Form CRS Relationship Summary; Amendments to Form ADV, 33492-33669 [2019-12376]

Download as PDF 33492 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations required by paragraph (a)(2)(iii) of this section, the broker or dealer establishes, maintains, and enforces written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest. (b) Definitions. Unless otherwise provided, all terms used in this rule shall have the same meaning as in the Securities Exchange Act of 1934. In addition, the following definitions shall apply for purposes of this section: (1) Retail customer means a natural person, or the legal representative of such natural person, who: (i) Receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an associated person of a broker or dealer; and (ii) Uses the recommendation primarily for personal, family, or household purposes. (2) Retail customer investment profile includes, but is not limited to, the retail customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the retail customer may disclose to the broker, dealer, or a natural person who is an associated person of a broker or dealer in connection with a recommendation. (3) Conflict of interest means an interest that might incline a broker, dealer, or a natural person who is an associated person of a broker or dealer —consciously or unconsciously—to make a recommendation that is not disinterested. ■ 3. Amend § 240.17a–3 by adding reserved paragraphs (a)(24) through (34) and paragraph (a)(35) to read as follows: jbell on DSK3GLQ082PROD with RULES2 § 240.17a–3 Records to be made by certain exchange members, brokers and dealers. (a) * * * (24)–(34) [Reserved]. (35) For each retail customer to whom a recommendation of any securities transaction or investment strategy involving securities is or will be provided: (i) A record of all information collected from and provided to the retail customer pursuant to § 240.15l–1, as well as the identity of each natural person who is an associated person, if any, responsible for the account. (ii) For purposes of this paragraph (a)(35), the neglect, refusal, or inability of the retail customer to provide or update any information described in paragraph (a)(35)(i) of this section shall excuse the broker, dealer, or associated VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 person from obtaining that required information. * * * * * ■ 4. Amend § 240.17a–4 by revising paragraph (e)(5) to read as follows: § 240.17a–4 Records to be preserved by certain exchange members, brokers and dealers. * * * * * (e) * * * (5) All account record information required pursuant to § 240.17a–3(a)(17) and all records required pursuant to § 240.17a–3(a)(35), in each case until at least six years after the earlier of the date the account was closed or the date on which the information was collected, provided, replaced, or updated. * * * * * By the Commission. Dated: June 5, 2019. Vanessa Countryman, Acting Secretary. [FR Doc. 2019–12164 Filed 7–11–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 200, 240, 249, 275, and 279 [Release Nos. 34–86032; IA–5247; File No. S7–08–18] RIN 3235–AL27 Form CRS Relationship Summary; Amendments to Form ADV Securities and Exchange Commission. ACTION: Final rule. AGENCY: The Securities and Exchange Commission (the ‘‘Commission’’ or the ‘‘SEC’’) is adopting new rules and forms as well as amendments to its rules and forms, under both the Investment Advisers Act of 1940 (‘‘Advisers Act’’) and the Securities Exchange Act of 1934 (‘‘Exchange Act’’) to require registered investment advisers and registered broker-dealers (together, ‘‘firms’’) to provide a brief relationship summary to retail investors. The relationship summary is intended to inform retail investors about: The types of client and customer relationships and services the firm offers; the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; whether the firm and its financial professionals currently have reportable legal or disciplinary history; and how to obtain additional information about the firm. The relationship summary will also SUMMARY: PO 00000 Frm 00176 Fmt 4701 Sfmt 4700 reference Investor.gov/CRS, a page on the Commission’s investor education website, Investor.gov, which offers educational information to investors about investment advisers, brokerdealers, and individual financial professionals and other materials. Retail investors will receive a relationship summary at the beginning of a relationship with a firm, communications of updated information following a material change to the relationship summary, and an updated relationship summary upon certain events. The relationship summary is subject to Commission filing and recordkeeping requirements. DATES: Effective dates: The rules and form are effective September 10, 2019. Compliance dates: The applicable compliance dates are discussed in section II.D. FOR FURTHER INFORMATION CONTACT: : Gena Lai, James McGinnis, Elizabeth Miller, Sirimal R. Mukerjee, Olawale´ Oriola, Alexis Palascak, Benjamin Tecmire, Roberta Ufford, Jennifer Porter (Branch Chief), Investment Adviser Regulation Office at (202) 551–6787 or IArules@sec.gov; Benjamin Kalish and Parisa Haghshenas (Branch Chief), Chief Counsel’s Office at (202) 551–6825 or IMOCC@sec.gov, Division of Investment Management; Alicia Goldin, Emily Westerberg Russell, Lourdes Gonzalez (Assistant Chief Counsel), Office of Chief Counsel, Division of Trading and Markets, at (202) 551–5550 or tradingandmarkets@sec.gov, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission is adopting new rule 17 CFR 275.204–5 [rule 204–5] under the Investment Advisers Act of 1940 [15 U.S.C. 80b] 1 and is adopting amendments to Form ADV to add a new Part 3: Form CRS [17 CFR 279.1] under the Advisers Act. The Commission is also adopting amendments to rules 17 CFR 275.203–1 [rule 203–1], 17 CFR 275.204–1 [rule 204–1], and 17 CFR 275.204–2 [rule 204–2] under the Advisers Act. The Commission is adopting new rule 17 CFR 240.17a–14 [rule 17a–14] 2 under the Securities 1 15 U.S.C. 80b. Unless otherwise noted, when we refer to the Advisers Act, or any paragraph of the Advisers Act, we are referring to 15 U.S.C. 80b, at which the Advisers Act is codified, and when we refer to rules under the Advisers Act, or any paragraph of these rules, we are referring to Title 17, part 275 of the Code of Federal Regulations [17 CFR 275], in which these rules are published. 2 15 U.S.C. 78a. Unless otherwise noted, when we refer to the Exchange Act, or any paragraph of the Exchange Act, we are referring to 15 U.S.C. 78a, at which the Exchange Act is codified, and when we E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations Exchange Act of 1934 and new Form CRS [17 CFR 249.641] under the Exchange Act. The Commission is also adopting amendments to rules 17 CFR 240.17a–3 [rule 17a–3] and 17 CFR 240.17a–4 [rule 17a–4] under the Exchange Act. The Commission is also adopting amendments to rule 17 CFR 200.800 [rule 800]. jbell on DSK3GLQ082PROD with RULES2 Table of Contents I. Introduction II. Form CRS Relationship Summary A. Presentation and Format 1. Limited Prescribed Wording 2. Standard Question-and-Answer Format and Other Presentation Instructions 3. Electronic and Graphical Formats, and Layered Disclosure 4. Conversation Starters 5. Presentation of Relationship Summaries by Dual Registrants and Affiliated Firms B. Items 1. Introduction 2. Relationships and Services 3. Summary of Fees, Costs, Conflicts, and Standard of Conduct 4. Disciplinary History 5. Additional Information 6. Proposed Items Omitted in Final Instructions C. Filing, Delivery, and Updating Requirements 1. Definition of Retail Investor 2. Filing Requirements 3. Delivery Requirements 4. Updating Requirements D. Transition Provisions E. Recordkeeping Amendments III. Disclosures About a Firm’s Regulatory Status and a Financial Professional’s Association IV. Economic Analysis A. Introduction B. Baseline 1. Providers of Financial Services 2. Investor Perceptions about the Marketplace for Financial Services and Disclosures 3. Investor Responses to Disclosures About Financial Professionals and Firms C. Broad Economic Considerations D. Economic Effects of the Relationship Summary 1. Retail Investors 2. Broker-Dealers and Investment Advisers (Registrants) 3. Impact on Efficiency, Competition, and Capital Formation 4. Alternatives to the Relationship Summary V. Paperwork Reduction Act Analysis A. Form ADV 1. Respondents: Investment Advisers and Exempt Reporting Advisers 2. Changes in Average Burden Estimates and New Burden Estimates 3. Total Revised Burden Estimates for Form ADV B. Rule 204–2 Under the Advisers Act 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. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 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 Exchange Act Rule 17a–3 F. Record Retention Obligations Under Exchange Act Rule 17a–4 1. Changes in Burden Estimates and New Burden Estimates 2. Revised Annual Burden Estimates VI. Final Regulatory Flexibility Analysis A. Need for and Objectives of the Amendments B. Significant Issues Raised by Public Comments 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 and Filing of the Relationship Summary 2. Delivery and Updating Requirements Related to the Relationship Summary 3. Recordkeeping Requirements Related to the Relationship Summary E. Agency Action To Minimize Effect on Small Entities VII. Statutory Authority Text of the Rule and Form I. Introduction Individual investors rely on the services of broker-dealers and investment advisers when making and implementing investment decisions. Research continues to show that retail investors are confused about the services, fees, conflicts of interest, and the required standard of conduct for particular firms, and the differences between broker-dealers and investment advisers.3 We are adopting a new set of disclosure requirements designed to reduce retail investor confusion in the marketplace for brokerage and investment advisory services and to assist retail investors with the process of deciding whether to engage, or to continue to engage, a particular firm 4 or 3 Brian Scholl, et al., SEC Office of the Investor Advocate and RAND Corporation, The Retail Market for Investment Advice (2018), available at https://www.sec.gov/comments/s7-07-18/s707184513005-176009.pdf (‘‘OIAD/RAND’’) (finding that participant understanding of types of financial services and financial professionals continues to be low). The SEC’s Office of Investor Advocate and the RAND Corporation prepared this research report regarding the retail market of investment advice prior to, and separate from, our rulemaking proposal. This report was included in the comment file at https://www.sec.gov/comments/s7-07-18/ s70718-4513005-176009.pdf. 4 For purposes of this release, the term ‘‘firm’’ includes sole proprietorships and other business organizations that are registered as (i) an investment PO 00000 Frm 00177 Fmt 4701 Sfmt 4700 33493 financial professional and whether to establish, or to continue to maintain, an investment advisory or brokerage relationship.5 Firms will deliver to retail investors a customer or client relationship summary (‘‘relationship summary’’ or ‘‘Form CRS’’) that provides succinct information about the relationships and services the firm offers to retail investors, fees and costs that retail investors will pay, specified conflicts of interest and standards of conduct, and disciplinary history, among other things.6 The relationship summary will also link to Investor.gov/ CRS on the Commission’s investor education website, Investor.gov, which offers educational information to investors about investment advisers, broker-dealers, and individual financial professionals and other materials. We proposed a version of a relationship summary on April 18, 2018.7 The proposed relationship summary would have required information separated into the following sections: (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); 8 (vi) conflicts of adviser under section 203 of the Advisers Act; (ii) a broker-dealer under section 15 of the Exchange Act; or (iii) a broker-dealer under section 15 of the Exchange Act and as an investment adviser under section 203 of the Advisers Act. 5 The requirements adopted here, with modifications as discussed in this release, were proposed in Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles, Investment Advisers Act Release No. 4888, Exchange Act Release No. 83063 (Apr. 18, 2018) [83 FR 23848 (May 23, 2018)] (‘‘Proposing Release’’). 6 For investment advisers registered with the Commission, a new Form ADV Part 3 will describe the requirements for the relationship summary and it will be required by amended rule 203–1. For broker-dealers, Form CRS will be required by 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 registered with the Commission. We are also adopting conforming technical and clarifying amendments to the General Instructions of Form ADV. 7 See Proposing Release, supra footnote 5. 8 We proposed definitions for ‘‘standalone investment adviser’’ and ‘‘standalone brokerdealer’’. See Proposed General Instruction 9.(f) to Form CRS. Given the streamlining and other revisions to the Form CRS instructions relative to the proposal, we believe that these proposed definitions are no longer needed and therefore are not adopting them. We use the terms throughout this release, however, for the avoidance of doubt, to indicate broker-dealers and investment advisers that are not dual registrants. We are adopting the E:\FR\FM\12JYR2.SGM Continued 12JYR2 33494 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 interest; (vii) where to find additional information, including whether the firm and its financial professionals currently have reportable legal or disciplinary history and who to contact about complaints; and (viii) key questions for retail investors to ask the firm’s financial professional. The proposed instructions required firms to use standardized headings in a prescribed order throughout the disclosure and respond to the required items by using a mix of language prescribed in the instructions as well as their own wording in describing their services and offerings. The proposal limited the relationship summary to four pages or an equivalent length if in electronic format and also included three examples of how the relationship summary might look for a standalone broker-dealer, a standalone investment adviser, and a dual registrant. To better understand retail investors’ views about the disclosures designed for them, the Commission engaged in broad outreach to investors and other market participants. As described further throughout the release, the Commission received substantial feedback on the proposed relationship summary in several forms. We received comment letters in connection with the Proposing Release from a variety of commenters including individual investors, consumer advocacy groups, financial services firms, investment professionals, industry and trade associations, state securities regulators, bar associations, and others.9 Several of those commenters provided alternative mockups to illustrate their suggestions. Additionally, some commenters submitted reports of surveys or studies that they had conducted or engaged third parties to conduct in connection with the proposal. The Commission also received input and recommendations from its Investor Advisory Committee (‘‘IAC’’) on the proposed relationship summary to improve its effectiveness.10 proposed definition for ‘‘dual registrant’’ substantially as proposed. We are adding language in the definition of dual registrant in the final instructions to clarify that a dually registered firm is not considered a dual registrant for purposes of Form CRS and the final instructions if the dually registered firm does not provide both investment advisory and brokerage services to retail investors. See General Instruction 11.C to Form CRS; see infra footnotes 201–202 and accompanying text. 9 The comment letters are available in the comment file at https://www.sec.gov/comments/s708-18/s70818.htm. 10 See Investor Advisory Committee, Recommendation of the Investor as Purchaser Subcommittee Regarding Proposed Regulation Best Interest, Form CRS, and Investment Advisers Act Fiduciary Guidance (Nov. 7, 2018), available at https://www.sec.gov/spotlight/investor-advisorycommittee-2012/iac110718-investor-as-purchaser- VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 The Commission also solicited comments from individual investors through a number of forums in addition to the traditional requests for comment in the Proposing Release. The Commission used a ‘‘feedback form’’ designed specifically to solicit input from retail investors with a set of questions requesting both structured and narrative responses, and received more than 90 responses from individuals who reviewed and commented on the sample proposed relationship summaries published in the proposal.11 Seven investor roundtables were held in different locations across the country to solicit further comment from individual investors on the proposed relationship summary, and we received in-person feedback from almost 200 attendees in total.12 subcommittee-recommendation.pdf. (‘‘IAC Form CRS Recommendation’’). The majority of the IAC recommended that the Commission conduct usability testing of the proposed Form CRS disclosures and, if necessary, revise them to ensure that they enable investors to make an informed choice among different types of providers and accounts. In addition, when considering potential Commission rulemaking under section 913 of the Dodd-Frank Act, the IAC also recommended that the Commission adopt a uniform, plain English disclosure document to be provided to customers and potential customers of broker-dealers and investment advisers at the start of the engagement, and periodically thereafter, that covers basic information about the nature of services offered, fees and compensation, conflicts of interest, and disciplinary record. See Investor Advisory Committee, Recommendation of the Investor Advisory Committee: Broker-Dealer Fiduciary Duty (Nov. 22, 2013), available at https://www.sec.gov/ spotlight/investor-advisory-committee-2012/ fiduciary-duty-recommendation-2013.pdf, as amended in https://www.sec.gov/spotlight/investoradvisory-committee-2012/iac112213-minutes.htm (‘‘IAC Broker-Dealer Fiduciary Duty Recommendations’’). We discuss these IAC findings and recommendations in several sections below. Under section 39 of the Exchange Act, the Commission is required to review, assess, and disclose the action, if any, the Commission intends to take with respect to the findings and recommendations of the IAC; however, the Commission is not required to agree or to act upon any such findings or recommendations. See 15 U.S.C. 78pp. 11 The feedback forms are available in the comment file at https://www.sec.gov/comments/s708-18/s70818.htm (‘‘Feedback Forms’’). When we refer to Feedback Form commenters, we include those who completed and submitted a Feedback Form with a relevant response or comment answering at least one of the questions on the form. To simplify discussion of comments received on the Feedback Forms, staff aggregated and summarized these comments in an appendix to this release (see Appendix C, the ‘‘Feedback Forms Comment Summary’’), and references to individual Feedback Forms in this release use short-form names defined in the Feedback Forms Comment Summary. 12 The transcripts from the seven investor roundtables, which took place in Atlanta (‘‘Atlanta Roundtable’’), Baltimore (‘‘Baltimore Roundtable’’), Denver (‘‘Denver Roundtable’’), Houston (‘‘Houston Roundtable’’), Miami (‘‘Miami Roundtable’’), Philadelphia (‘‘Philadelphia Roundtable’’), and Washington, DC (‘‘Washington, DC Roundtable’’), are available in the comment file at https:// PO 00000 Frm 00178 Fmt 4701 Sfmt 4700 Further, the Commission’s Office of the Investor Advocate engaged the RAND Corporation (‘‘RAND’’) to conduct investor testing of the proposed relationship summary.13 RAND conducted a survey of over 1,400 individuals through a nationally representative panel to collect information on the opinions, preferences, attitudes, and level of selfassessed comprehension regarding the sample dual-registrant relationship summary in the proposal. RAND also conducted qualitative interviews of a smaller sample of individuals to ascertain comprehension of the relationship summary and gain feedback from interview participants, which allowed RAND to obtain insights to complement its survey.14 On November 7, 2018, the Office of the Investor Advocate made the report on that testing available in the comment file to allow the public to consider and comment on the supplemental information.15 The Commission received several letters in response to the inclusion of the RAND 2018 report in the comment file.16 As noted, some commenters submitted reports of surveys and studies to the comment file, and the design and scope of these varied considerably. Two reports described online surveys of www.sec.gov/comments/s7-08-18/ s70818.htm#transcripts. 13 Angela A. Hung, et al., RAND Corporation, Investor Testing of Form CRS Relationship Summary (2018), available at https://www.sec.gov/ about/offices/investorad/investor-testing-form-crsrelationship-summary.pdf (‘‘RAND 2018’’). 14 RAND conducted a total of 31 in-person interviews with investors recruited using guidelines designed to achieve a sample that had a broad range of educational background, racial and ethnic characteristics, gender, age and experience working with financial professionals. In describing the design of qualitative interviews, RAND explains that interviews included some general questions about comprehension and helpfulness of the form, which provided a window into participants’ understanding of concepts introduced in the relationship summary, but were not designed to serve as a full assessment of participants’ objective understanding of the relationship summary. See RAND 2018, supra footnote 13. 15 See Investor Testing of the Proposed Relationship Summary for Investment Advisers and Broker-Dealers, Securities and Exchange Commission Press Release 2018–257 (Nov. 7, 2018), available at https://www.sec.gov/news/pressrelease/2018-257. 16 See, e.g., Comment Letter of Investment Adviser Association (Dec. 4, 2018); Comment Letter of Ron A. Rhodes (Dec. 6, 2018); Comment Letter of AFL–CIO, et al. (Dec. 7, 2018) (‘‘AFL–CIO Letter’’); Comment Letter of Betterment (Dec. 7, 2018) (‘‘Betterment Letter II’’); Comment Letter of Consumer Federation of America (Dec. 7, 2018) (‘‘CFA Letter II’’); Comment Letter of Financial Services Institute (Dec. 7, 2018) (‘‘FSI Letter II’’); Comment Letter of Public Investors Arbitration Bar Association (Dec. 7, 2018); Comment Letter of Consumer Reports (Feb. 15, 2019) (‘‘Consumer Reports Letter’’). E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 larger sample sizes—one based on the sample proposed dual-registrant relationship summary 17 and another based on the proposed sample standalone investment adviser relationship summary.18 A group of commenters submitted two reports of usability testing of the sample proposed dual-registrant relationship summary based on a small number of long-form interviews.19 One of the two surveys, and the two interview-based studies, included questions designed to ascertain comprehension and tested alternate relationship summary designs with changes to some of the proposed prescribed wording and presentation from the proposal.20 Finally, two different commenters submitted surveys of retail investors’ views about disclosure communications provided by firms and their relationships with financial professionals, which did not 17 Comment Letter of Cetera Financial Group (Nov. 19, 2018) (‘‘Cetera Letter II’’) (attaching report of Woelfel Research Inc. (‘‘Woelfel’’)). Woelfel, an independent research firm, conducted internet interviews in June 2018 with a sample of 800 adults aged 25 and over, including individuals that had a current relationship with a financial professional and individuals who did not have a current financial professional relationship. Respondents were asked to read the sample dual-registrant relationship summary included in the proposal and answer a series of questions about the document overall and for specific sections. Id. 18 Comment Letter of Betterment (Aug. 7, 2018) (‘‘Betterment Letter I’’) (attaching report of Hotspex, Inc. (‘‘Hotspex’’)). Hotspex, an independent research firm, conducted online surveys with 304 current or potential U.S. investors ages 18 and over in June 2018. The survey tested the standalone investment adviser relationship summary prepared following the instructions and sample design of the proposal (the ‘‘SEC Form’’) and a redesigned version developed by Betterment. Id. Respondents reviewed and answered questions about only one version; 154 responded to questions on the SEC Form. Id. 19 Kleimann Communication Group, Inc., Final Report on Testing of Proposed Customer Relationship Summary Disclosures, Submitted to AARP, Consumer Federation of America, and Financial Planning Coalition (Sept. 10, 2018), available at https://www.sec.gov/comments/s7-0818/s70818-4341455-173259.pdf (‘‘Kleimann I’’) (results of 15 90-minute qualitative interviews focusing on how consumers interacted with the sample dual-registrant relationship summary as proposed); Kleimann Communication Group, Inc., Report on Development and Testing of Model Client Relationship Summary, Presented to AARP and Certified Financial Planner Board of Standards, Inc. (Dec. 5, 2018), available at https://www.sec.gov/ comments/s7-07-18/s70718-4729850-176771.pdf (‘‘Kleimann II’’) (results of testing alternate designs of the proposed dual-registrant relationship summary in 18 one-on-one qualitative interviews). 20 See Betterment Letter I (Hotspex), supra footnote 18 (online survey included ten true-false questions designed to test investor comprehension of the standalone investment adviser relationship summary as proposed relative to a version redesigned by Betterment); Kleimann I, supra footnote 19 (interview questions designed to elicit responses that could demonstrate two levels of cognitive skills); Kleimann II, supra footnote 19. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 test any version of the proposed relationship summary.21 The Commission appreciates the time and effort of these commenters who submitted surveys and studies. The Commission has carefully considered this input. The varying designs and scope of these surveys and studies limits us from drawing definitive conclusions, and we do not view any one of the surveys and studies submitted by commenters, or the RAND 2018 report, as dispositive. However, these surveys and studies submitted by commenters, together with the results of the RAND 2018 report, input from individual investors at our roundtables and on Feedback Forms, and other information offered by other commenters, have informed our policy choices. Throughout this release we discuss observations reported in the RAND 2018 report and in surveys and studies submitted by commenters, and how these observations informed our policy choices as well as the costs and benefits of such choices. Overall, we believe that feedback we have received from or on behalf of retail investors through the RAND 2018 report, surveys and studies submitted by commenters, and input received at roundtables and on Feedback Forms, demonstrate that the proposed relationship summary would be useful for retail investors and provide information, e.g., about services, fees and costs, and standard of care, that would help investors to make more informed choices when deciding among firms and account options. For example, among the RAND 2018 survey respondents, nearly 90% said that the relationship summary would help them make more informed decisions about types of accounts and services and more than 80% said it would help them compare accounts offered by different firms.22 RAND 2018 survey participants rated information about the firm’s relationship and services and fees and costs to be among the most 21 Comment Letter of Charles Schwab & Co., Inc. (Aug. 6, 2018) (‘‘Schwab Letter I’’) (attaching report of Koski Research (‘‘Koski’’)). Koski, an independent research firm, conducted an online survey of a national sample of 1000 investors in June 2018 to measure investor understanding of fiduciary duty and best interest standards for investment advice and obtain input from retail investors on method, frequency and content of disclosure communications. Id.; Comment Letter of the Center for Capital Markets Competitiveness of the U.S. Chamber of Commerce (Sept. 5, 2018) (‘‘CCMC Letter’’) (attaching report of investor polling (‘‘investor polling’’)). CCMC commissioned online polling of 801 investors in May 2018 to examine investors’ perspectives on working with financial professionals and gauge priorities regarding new regulatory requirements. Id. 22 RAND 2018, supra footnote 13. PO 00000 Frm 00179 Fmt 4701 Sfmt 4700 33495 informative.23 In other surveys, large majorities of respondents also reacted positively to the relationship summary and the types of information that would be provided.24 In the RAND 2018 qualitative interviews, it was observed that participants could learn new information from the proposed relationship summary.25 Similarly, other surveys and studies that assessed investor comprehension observed that investors learned important information by reviewing the relationship summary.26 Over 70% of individuals submitting Feedback Forms commented that they found the relationship summary to be ‘‘useful,’’ with more than 80% rating the relationship summary sections describing relationships and services, obligations, and fees and costs as ‘‘very useful’’ or ‘‘useful.’’ 27 Investor roundtable participants also reacted 23 RAND 2018, supra footnote 13 (a majority of respondents rated both of the relationships and services section and fees and costs sections of the relationship summary as one of two sections that are ‘‘most informative’’). 24 Cetera Letter II (Woelfel), supra footnote 17 (more than 80% of respondents rated all of the nine topics covered by the relationship summary as ‘‘very’’ or ‘‘somewhat’’ important; 88% rated fees and costs and the firm’s obligations as ‘‘very’’ or ‘‘somewhat’’ important; 61% said the relationship summary had provided the necessary information to help decide whether a brokerage relationship or an advisory relationship is best); Betterment Letter I (Hotspex), supra footnote 18 (finding that around 90% of survey respondents found the proposed relationship summary ‘‘very useful’’ or ‘‘somewhat useful’’); see also CCMC Letter (investor polling), supra footnote 21 (when the concept of the proposed relationship summary was described, 62% of participants said they would be interested in reading the document and 72% agreed that the new document will ‘‘boost transparency and help build stronger relationships between me and my financial professional’’). 25 RAND 2018, supra footnote 13 (concluding from qualitative interviews that ‘‘[p]articipants demonstrated evidence of learning new information from the relationship summary’’ even though interview discussions revealed areas of confusion). 26 See Kleimann I, supra footnote 19 (although the authors concluded that, overall, participants had difficulty with ‘‘sorting out similarities and differences,’’ the study reports that ‘‘nearly all participants easily identified a key difference between Brokerage Accounts and Advisory accounts as the fee structure’’ and that ‘‘most participants understood that both Brokerage Accounts and Advisory Accounts could have financial relationships with other companies that could be potential conflicts with clients’ best interests.’’); see also Betterment Letter I (Hotspex), supra footnote 18 (83% of respondents correctly identified as ‘‘true’’ a statement that ‘‘some investment firms have a conflict of interest because they benefit financially from recommending certain investments’’ when viewing a version of the standalone adviser relationship summary constructed based on the instructions set forth in the proposal’’). 27 See Feedback Forms Comment Summary, supra footnote 11 (summary of answers to Questions 1 and 2). In addition, more than 70% of commenters on Feedback Forms rated all of the other sections of the proposed relationship summary as ‘‘very useful’’ or ‘‘useful.’’ Id. E:\FR\FM\12JYR2.SGM 12JYR2 33496 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 positively and indicated that they found the relationship summary to be useful.28 A significant percentage of RAND 2018 survey participants agreed that the relationship summary would facilitate conversations between retail investors and their financial professionals, and other surveys and studies reported similar observations.29 Investor roundtable participants and comments on Feedback Forms also indicated that the relationship summary could facilitate conversations between retail investors and their financial professionals in a beneficial way.30 Many other commenters supported the concept of a short disclosure document for retail investors that would serve as part of a layered disclosure regime,31 and agreed that that the 28 See e.g., Houston Roundtable, at 19 (‘‘I think your idea of having . . . a short four page . . . is really helpful’’), at 27 (reacting positively to the idea of the relationship summary but asking that updated versions indicate the changed content), and at 35 (agreeing that a disclosure such as the relationship summary is needed); Atlanta Roundtable, at 28 (stating that the proposed sample relationship summary is ‘‘a very good form’’ and ‘‘concise’’ and ‘‘easy to read and clear’’ but needs to be in a form that can be compared with other relationship summaries). 29 RAND 2018, supra footnote 13 (approximately 76% of participants agreed that they would use the relationship summary as the basis for a conversation with an investment professional; in qualitative interviews, participants said they liked all of the questions and they would ask questions in meeting with a financial service provider); see also Kleimann I, supra footnote 19 (many investors responded that they would use key questions when speaking with their brokers); Betterment Letter I (Hotspex), supra footnote 18 (93% of respondents viewing a version of the proposed standalone relationship summary indicated that they were very or somewhat likely to ask the suggested questions.). 30 Houston Roundtable (several investors responding that key questions would be helpful conversation starters, one commenter remarking that the Key Questions were ‘‘very, very good’’); Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 7) (over 75% of commenters indicated that the Key Questions are useful). Eleven Feedback Forms included specific comments agreeing that the Key Questions would encourage discussions with financial professionals. See, e.g., Hawkins Feedback Form (‘‘Useful information for the investor to have before engaging in a conversation with an investment firm. Giving some examples of types of questions to ask would be beneficial.’’); Asen Feedback Form (‘‘The Relationship Summary (and not the individual BD or RIA account opening forms) is the opportunity to have that important conversation and ‘‘educate’’ the customer.’’); Baker Feedback Form (‘‘key questions are very useful as they give words to an unsophisticated client’’). 31 See, e.g., Comment Letter of AARP (Aug. 7, 2018) (‘‘AARP Letter’’); Comment Letter of Consumers Union (Oct. 19, 2018) (‘‘Consumers Union Letter’’); Comment Letter Type B; Comment Letter of the North American Securities Administrators Association, Inc. (Aug. 23, 2018) (‘‘NASAA Letter’’); Comment Letter of the Securities Industry and Financial Markets Association (Aug. 7, 2018) (‘‘SIFMA Letter’’); Comment Letter of Triad Advisors, LLC (Jul. 26, 2018) (‘‘Triad Letter’’); Comment Letter of Investacorp, Inc. (Jul. 26, 2018) (‘‘Investacorp VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 relationship summary would facilitate conversations between retail investors and their financial professionals in a beneficial way.32 However, some commenters argued that the relationship summary is duplicative of other disclosures and is unnecessary.33 Others cautioned against over-reliance on disclosure efforts to address all issues related to the different business models and the applicable standard of conduct for broker-dealers and investment advisers.34 Nearly all commenters (including commenters on Feedback Forms) and investors participating in roundtables, Letter’’); Comment Letter of Ladenburg Thalmann Financial Services Inc. (Jul. 26, 2018) (‘‘Ladenburg Letter’’); Comment Letter of KMS Financial Services, Inc. (Jul. 27, 2018) (‘‘KMS Financial Letter’’); Comment Letter of Securities America, Inc. (Jul. 27, 2018) (‘‘Securities America Letter’’). 32 See, e.g., Comment Letter of Commonwealth Financial Network (Aug 7, 2018) (‘‘CFN Letter’’) (‘‘Form CRS may also drive conversations that help potential clients and advisors determine which type of relationship (brokerage or advisory) is most appropriate.’’); CCMC Letter (concluding from investor polling that ‘‘[t]he SEC’s proposed Form CRS could be a good way to start a conversation with investors.’’); Comment Letter of the Financial Services Institute (Aug. 7, 2018) (‘‘FSI Letter I’’) (‘‘The greatest benefit of these disclosures will come in the conversations they facilitate between the client and their financial professionals’’); Comment Letter Wells Fargo & Company (Aug. 7, 2018) (‘‘Wells Fargo Letter’’) (‘‘the basic premise that a brief overview document designed to provide a high-level understanding of important information to clients (with directions to more detailed information) that can be used to prompt more detailed conversations with financial professionals is a good one’’). Triad Letter (‘‘The greatest benefit of the CRS will come in the conversations it facilitates between the client and their Financial Professional. . . .’’); Ladenburg Letter (same); KMS Financial Letter (same). 33 Some commenters stated that Form CRS would be duplicative of the Disclosure Obligation required by Regulation Best Interest. See, e.g., Triad Letter; Investacorp Letter; Ladenburg Letter; KMS Financial Letter; Securities America Letter; FSI Letter I; Comment Letter of Securities Service Network, LLC (Aug. 6, 2018); Comment Letter of Cambridge Investment Research, Inc. (Aug. 7, 2018) (‘‘Cambridge Letter’’). Others argued that Form CRS is duplicative of other Form ADV disclosures. See, e.g., Comment Letter of MarketCounsel (Aug. 7, 2018) (‘‘MarketCounsel Letter’’); Comment Letter of the Investment Adviser Association (Aug. 6, 2018) (‘‘IAA Letter I’’); Comment Letter of Gerald Lopatin (Jul. 30, 2018). One commenter expressed concern that because the relationship summary would be duplicative of Form ADV and Form BD, retail customers would be less likely to read the more comprehensive disclosures. See Comment Letter of Financial Engines (Aug. 6, 2018) (‘‘Financial Engines Letter’’). 34 See Comment Letter of Integrated Financial Planning Solutions (Jul. 20, 2018) (‘‘IFPS Letter’’) (‘‘Clients do not have the ability to understand the disclosure material that is still written only by and for lawyers.’’); Comment Letter of Sen. Elizabeth Warren (Aug. 7, 2018) (‘‘Warren Letter’’) (arguing that ‘‘the [Commission] shouldn’t rely on disclosure alone to protect consumers’’); Consumers Union Letter (‘‘[W]hile we support simple, understandable disclosures, we caution against placing too much reliance on disclosure to protect investors.’’); Consumer Reports Letter. PO 00000 Frm 00180 Fmt 4701 Sfmt 4700 suggested modifications to the proposed relationship summary, as did observations reported in the RAND 2018 report and surveys and studies submitted to the comment file. Suggested changes generally pertained to: Appropriate placement of educational material; length and format; use of prescribed wording; comprehensibility; additional flexibility for firms; and delivery requirements (including electronic delivery). For example, some commenters and observations from the RAND 2018 survey and other surveys and studies indicated that the proposed relationship summary could be difficult to understand, particularly the proposed disclosures on fees, conflicts of interest, and standards of conduct.35 Many commenters preferred a shorter, one-totwo page document relying more heavily on layered disclosure, such as by using more hyperlinks and other cross-references to more detailed disclosure.36 Many commenters from both industry and investor groups argued that some of the prescribed wording would not be accurate or applicable in relation to the different services and business models of all firms or could lead to confusing or 35 See RAND 2018, supra footnote 13 (among other findings, the percentages of respondents indicating that the fees and costs, conflicts of interest, and standards of conduct sections were either ‘‘difficult’’ or ‘‘very difficult’’ to understand were 35.5%, 33.5%, and 22.9%, respectively); Kleimann I, supra footnote 19 (noting that participants had difficulty ‘‘sorting out similarities and differences between Broker-Dealer Services and Investment Adviser Services. Both the formatting and language contributed to the confusion.’’); Betterment Letter I (Hotspex), supra footnote 18 (showing that survey participants had difficulty understanding differences in standard of care and did not find the section on conflicts in the standalone adviser relationship summary to be useful); see also Comment Letter of John Wahh (Apr. 23, 2018) (‘‘Wahh Letter’’) (relationship summary is ‘‘impenetrable’’); Comment Letter of David John Marotta (Apr. 26, 2018) (‘‘Marotta Letter’’) (disclosures would be too confusing to clients); Comment Letter of John H. Robinson (Aug. 6, 2018) (‘‘Robinson Letter’’) (expressing concern that relationship summary is too text-heavy for consumers to read and will be ineffective in resolving investor confusion); Comment Letter of CFA Institute (Aug. 7, 2018) (‘‘CFA Institute Letter I’’) (‘‘[A]s proposed, CRS is too wordy and technically written for the average investor to understand.’’). 36 See, e.g., AARP Letter; Comment Letter of Better Markets (Aug. 7, 2018) (‘‘Better Markets Letter’’); Comment Letter of the Bank of America (Aug. 7, 2018) (‘‘Bank of America Letter’’); Comment Letter of the Committee on Capital Markets Regulation (Jul. 16, 2018) (‘‘CCMR Letter’’); Comment Letter of LPL Financial LLC (Aug. 7, 2018) (‘‘LPL Financial Letter’’); Schwab Letter I. Cf. RAND 2018, supra footnote 13 (finding at least a plurality of respondents would keep the length of each section ‘‘as is’’; however, when asked ‘‘Is the Relationship Summary too long, too short, or about right?’’, 56.9% of respondents answered ‘‘too long’’ and only 41.2% responded ‘‘about right’’). E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 misleading disclosures.37 Various commenters advocated for more flexibility for firms to use their own wording to describe their services more accurately.38 Many commenters favored 37 See, e.g., Comment Letter of the Vanguard Group, Inc. (Aug. 7, 2018) (‘‘Vanguard Letter’’) (explaining instances in which the prescribed wording would be inaccurate or not sufficiently nuanced for some of its services); Comment Letter of the American Council of Life Insurers (Aug. 3, 2018) (‘‘ACLI Letter’’) (‘‘[M]any of the statements mandated in the Proposed Rule are inaccurate from the perspective of a life insurer-affiliated brokerdealer); IAA Letter I (expressing concern that the proposed prescribed language describing legal standards of conduct would result in less accurate understanding and greater confusion for investors); FSI Letter I (‘‘[S]ome of the prescribed disclosure language is highly problematic, will add to investor confusion, and would negatively impact [firms’] client relationships.’’); AARP Letter (expressing concern that some of the prescribed language is too technical and likely to confuse retail investors); Comment Letter of the Insured Retirement Institute (Aug. 7, 2018) (‘‘IRI Letter’’) (expressing concern that the prescribed language would not permit descriptions of services offered outside of brokerage accounts, such as recommendations of variable annuities). One commenter asserted that prescribed wording requiring firms to compare themselves adversely with their competitors could raise First Amendment concerns. See Comment Letter of the Consumer Federation of America (Aug. 7, 2018) (‘‘CFA Letter I’’) (arguing that certain language requiring firms to compare their own services unfavorably to those of their competitors may raise First Amendment concerns, and that Proposed Item 5, Comparisons to be provided by standalone investment advisers and standalone broker-dealers, should be eliminated entirely); see also infra footnotes 77–80 and accompanying text. Although not explicitly raising First Amendment concerns, another commenter also opposed requiring firms to describe services of other types of financial professionals. See IAA Letter I (‘‘In our view, it is not appropriate to require firms to include statements about business models other than their own.’’). But see Comment Letter of AFL–CIO, Consumer Federation of America, et. al. (Apr. 26, 2019) (‘‘AFL–CIO, CFA Letter’’) (arguing that allowing firms more flexibility in their disclosure will result in a failure to clearly convey important information, and such information would not be comparable from firm to firm). 38 See, e.g., ACLI Letter (‘‘Firms should have the flexibility in the Form CRS to accurately describe their business model and what their clients can expect from the relationship’’); NASAA Letter (‘‘[F]irms should have some level of flexibility in crafting their own Form CRS so that it is tailored for the different types of customers they service.’’); Letter from Members of Congress (Aug. 8, 2019) (‘‘The SEC should develop a disclosure form that ensures firms have the flexibility to provide information that the average investor will understand.’’); IAA Letter I (advocating that firms be given flexibility to draft their own descriptions of their principal services and conflicts of interest); FSI Letter I (suggesting that the prescribed wording regarding the extent and frequency of monitoring be removed or customized using the firm’s own wording); IRI Letter (firms need more latitude to describe their relationships and services and fees and costs, given their variability; one-size-fits-all disclosures are insufficient); Comment Letter of T. Rowe Price (Aug. 10, 2018) (‘‘T. Rowe Letter’’) (firms should have the flexibility to tailor their disclosures to make it clearer and more readable without potentially confusing investors); Vanguard Letter (suggesting that the Commission clarify that all of the prescribed disclosures may be modified to accurately describe the nature of firms’ services VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 the use of a question-and-answer format, suggesting, for example, that focusing a document on investors’ questions helps them to feel that the document is relevant to them and encourages them to read it.39 Some commenters viewed parts of the relationship summary as educational, such as the sections comparing broker-dealers and investment advisers, describing the applicable standard of conduct, and containing key questions investors should ask, and advocated that the Commission should develop and provide educational material separately from firm-specific disclosures, such as in an additional disclosure layer or on the Commission’s website.40 Several individuals submitting Feedback Forms also were supportive of links to additional educational information.41 Although some commenters argued that the relationship summary is duplicative of other disclosures and is unnecessary,42 we believe that the relationship summary has a distinct purpose and will provide a separate and important benefit relative to other disclosures. The relationship summary is designed to help retail investors select or determine whether to remain with a firm or financial professional by providing better transparency and summarizing in one place selected information about a particular brokerand conflicts of interest given their business models); Comment Letter of CUNA Mutual Group (Aug. 7, 2018). 39 See, e.g., CFA Letter I. Many of the mock-ups submitted by commenters used a question-andanswer format. See Comment Letter of Fidelity Brokerage Services LLC (Aug. 7, 2018) (‘‘Fidelity Letter’’); IAA Letter I; LPL Financial Letter; Comment Letter of Primerica (Aug. 7, 2018) (‘‘Primerica Letter’’); Schwab Letter I; SIFMA Letter; Wells Fargo Letter. For the purposes of this release, we view the substance and design of all mock-ups that commenters provided within their comment letters as comments on our proposed form, and the mock-ups have informed our approach to the relationship summary, as discussed below throughout. 40 See, e.g., Comment Letter of the American Securities Association (Aug. 7, 2018) (‘‘ASA Letter’’); Primerica Letter; ACLI Letter; IAA Letter I; Comment Letter of Pickard Djinis and Pisarri LLP (Aug. 14, 2018) (‘‘Pickard Djinis and Pisarri Letter’’); Comment Letter of L.A. Schnase (Jul. 30, 2018) (‘‘Schnase Letter’’); CFA Letter I; LPL Financial Letter. 41 See, e.g., Daunheimer Feedback Form (‘‘I would like to see a list of applicable websites for discerning disciplinary websites or anything else that would additionally educate a consumer.’’); Asen Feedback Form (‘‘Might want to consider hyperlinking key words for ease of definition lookup.’’); Baker Feedback Form (responding to a question on the Additional Information section, commented ‘‘Helpful also were the website links, i.e., sec.gov, investor.gov, BrokerCheck.Finra.org.’’); Smith2 Feedback Form (‘‘would like to see a link included a site or sites that contain general investment information. Types of investments, risks, time horizons . . .’’). 42 See supra footnote 33. PO 00000 Frm 00181 Fmt 4701 Sfmt 4700 33497 dealer or investment adviser. The format of the relationship summary also allows for comparability among the two different types of firms in a way that is distinct from other required disclosures. Both broker-dealers and investment advisers must provide disclosures on the same topics under standardized headings in a prescribed order to retail investors, which should benefit retail investors by allowing them to more easily compare services by comparing different firms’ relationship summaries.43 We do not believe that existing disclosures provide this level of transparency and comparability across investment advisers, broker-dealers, and dual registrants. The relationship summary also encourages retail investors to ask questions and highlights additional sources of information. All of these features should make it easier for investors to get the facts they need when deciding among investment firms or financial professionals and the accounts and services available to them. As noted above, the relationship summary will complement additional rules and guidance that the Commission is adopting concurrently to enhance protections for retail investors and is not designed to address all investor protection issues related to different business models and legal obligations of broker-dealers and investment advisers.44 Further to this purpose, in response to the comment letters and other feedback, we modified the instructions to reorganize and streamline the relationship summary, to enable more accurate descriptions tailored to what firms offer, and to help improve investor understanding of the disclosures provided. The instructions we are adopting are consistent with and designed to fulfill the original goals of the proposal, including the creation of relationship summaries that will highlight certain information in one place for retail investors in order to help them select or decide whether to remain with a firm or financial professional, encourage retail investors to engage in meaningful and individualized conversations with their financial professionals, and empower them to easily find additional information. Although certain prescribed generalized 43 Several individuals submitting Feedback Forms said that more firm-specific information that could be easily compared would be helpful. See, e.g., Lee1 Feedback Form (‘‘The information should let me compare firms. . . . Make it short, more useful (so I can compare services and firms).’’); Anonymous13 Feedback Form (‘‘Firm specific info would be nice on this document.’’); Bhupalam Feedback Form (‘‘I would like to see additional information regarding specific firm rather than a general description.’’). 44 See supra footnote 34. E:\FR\FM\12JYR2.SGM 12JYR2 33498 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 comparisons between brokerage and investment advisory services have been removed from the final instructions, we believe the revised instructions will result in more meaningful comparisons among firms. The key changes of the relationship summary and instructions we are adopting include the following: 45 • Standardized Question-and-Answer Format and Less Prescribed Wording. Instead of declarative headings as proposed, the final instructions for the relationship summary will require a question-and-answer format, with standardized questions serving as the headings in a prescribed order to promote consistency and comparability among different relationship summaries. The headings will be structured and machine-readable, to facilitate data aggregation and comparison. Under the standardized headings, firms will generally use their own wording to address the required topics. Thus, the final instructions contain less prescribed language, which creates more flexibility in providing accurate information to investors. Investment advisers and broker-dealers will be limited to two pages and dual registrants will be limited to four pages (or an equivalent length if in electronic format).46 • Use of Graphics, Hyperlinks, and Electronic Formats. To help retail investors easily digest the information, the instructions will specifically encourage the use of charts, graphs, tables, and other graphics or text features in order to explain or compare different aspects of the firm’s offerings. If the chart, graph, table, or other graphical feature is self-explanatory and responsive to the disclosure item, additional narrative language that may be duplicative is not required. For electronic relationship summaries, the instructions encourage online tools that populate information in comparison boxes based on investor selections. The instructions permit, and in some instances require, a firm to crossreference additional information (e.g., concerning services, fees, and conflicts), and will require embedded hyperlinks in electronic versions to further facilitate layered disclosures. Firms must use text features to make the required cross-references more 45 If any of the provisions of these rules, or the application thereof to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other persons or circumstances that can be given effect without the invalid provision or application. 46 For clarification purposes, one page is equivalent to a single-side of text on a sheet of paper, rather than two sides of the same paper. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 noticeable and prominent in relation to other discussion text. • Introduction With Link to Commission Information. The relationship summary will include a more streamlined introductory paragraph that will provide a link to Investor.gov/CRS, a page on the Commission’s investor education website, Investor.gov, which offers educational information about investment advisers, broker-dealers, and individual financial professionals and other materials. In order to highlight the importance of these materials, the introduction also will note that brokerage and advisory services and fees differ and that it is important for the retail investor to understand the differences. • Combined Fees, Costs, Conflicts of Interest, and Standard of Conduct Section. We are integrating the proposed fees and costs section with the sections discussing the conflicts of interest and standards of conduct. We are also expanding the discussion of fees and making several other changes to help make the disclosures clearer for retail investors. The relationship summary will cover the same broad topics as proposed, including a summary of fees and costs, a description of ways the firm makes money, certain conflicts of interest, and standards of conduct. In addition, firms will include disclosure about financial professionals’ compensation. • Separate Disciplinary History Section. Firms will be required to indicate under a separate heading whether or not they or any of their financial professionals have reportable disciplinary history and where investors can conduct further research on these events, instead of including this information under the Additional Information section as proposed. • Conversation Starters. The proposed Key Questions to Ask have generally been integrated into the relationship summary sections either as question-and-answer headings or as additional ‘‘conversation starters’’ to provide clearer context for the questions. Retail investors can use these questions to engage in dialogue with their financial professionals about their individual circumstances. The discussion topics raised by certain other proposed key questions have been incorporated into the relationship summary through otherwise-required disclosure. • Elimination of Proposed Comparisons Section. We are eliminating the proposed requirement that broker-dealers and investment advisers include a separate section PO 00000 Frm 00182 Fmt 4701 Sfmt 4700 using prescribed wording that in a generalized way described how the services of investment advisers and broker-dealers, respectively, differ from the firm’s services. We encourage, but do not require, dual registrants to prepare a single relationship summary that discusses both brokerage and investment advisory services. Whether dual registrants prepare a single or two separate relationship summaries to describe their brokerage and investment advisory services, they must present information on both services with equal prominence and in a manner that clearly distinguishes and facilitates comparison between the two. The material provided on Investor.gov offers educational information about investment advisers, broker-dealers, and individual financial professionals and other materials. • Delivery. As proposed, investment advisers must deliver a relationship summary to each new or prospective client who is a retail investor before or at the time of entering into an investment advisory contract with the retail investor. In a change from the proposal, broker-dealers must deliver the relationship summary to each new or prospective customer who is a retail investor before or at the earliest of: (i) A recommendation of an account type, a securities transaction, or an investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) the opening of a brokerage account for the retail investor. We also are revising the instructions to provide greater clarity on the use of electronic delivery, while generally maintaining the guidelines that were proposed. We designed the final disclosure requirements in light of comments, input from individual investors through roundtables and on Feedback Forms, and observations reported in the RAND 2018 report and other surveys and studies, that suggest retail investors benefit from receiving certain information about a firm before the beginning of a relationship with that firm, but they prefer condensed disclosure so that they may focus on information that they perceive as salient to their needs and circumstances, and prefer having access to other ‘‘layers’’ of additional information rather than receiving a significant amount of information at once. Together, all of the required disclosures will assist a retail investor to make an informed choice regarding whether a brokerage or investment advisory relationship, as well as whether a particular brokerdealer or investment adviser, best suits his or her particular needs and E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 circumstances. The relationship summary will complement additional rules and guidance that the Commission is adopting concurrently to enhance protections for retail investors.47 Some commenters responding to the RAND 2018 report noted that the RAND 2018 survey and qualitative interviews did not objectively test investor comprehension, and they pointed to observations from RAND 2018 interviews that suggested that some interview participants failed to understand differences in the legal standards that apply to brokerage and advisory accounts and did not understand the meaning of the word ‘‘fiduciary’’ for example.48 They argued that we should conduct more usability testing before adopting Form CRS and Regulation Best Interest.49 47 See Regulation Best Interest, Exchange Act Release No. 86031 (June 5, 2019) (adopting rule 15l– 1 under the Exchange Act (‘‘Regulation Best Interest’’)) (‘‘Regulation Best Interest Release’’). Along with adopting Regulation Best Interest, the Commission is clarifying standards of conduct for investment advisers. See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Advisers Act Release No. 5248 (June 5, 2019) (‘‘Fiduciary Release’’). The Commission is also providing guidance about when a brokerdealer’s advisory services are solely incidental to the conduct of the business of a broker or dealer. See Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion to the Definition of Investment Adviser, Advisers Act Release No. 5249 (June 5, 2019) (‘‘Solely Incidental Release’’). 48 See CFA Letter II (noting that the testing conducted for the RAND 2018 Report is limited and does not provide more detailed information, such as transcripts of the in-depth interviews, to present fully the level of investor understanding); Comment Letter of CFA Institute (May 16, 2019) (‘‘CFA Institute Letter II’’) (‘‘The RAND Report is clear that its survey was not designed to measure objective comprehension . . . Nor did it provide respondents with alternatives that could have allowed them to express preferences for certain formats or language.’’). See also AFL–CIO Letter; Consumer Reports Letter; Comment Letter of PIABA (Dec. 7, 2018). 49 See, e.g., AFL–CIO Letter (‘‘If the Commission chooses to maintain different standards for brokers and advisers, it must clearly delineate what the differences are . . . This would require rethinking the Form CRS and re-testing to ensure that it achieves these goals . . .’’); CFA Letter II (‘‘make the [RAND 2018] report the start, not the end, of an iterative process of testing and revision needed to develop disclosure that works . . .’’); AFL–CIO, CFA Letter (stating ‘‘. . . unless the Commission retests the revised disclosure, it won’t have any way to know whether the revised version solves the problems that earlier testing has identified.’’); Consumer Reports Letter (‘‘SEC must test and retest Form CRS disclosures . . . and continue to publish the results of its testing before the form is made final’’); CFA Institute Letter II. Others commented on the results of the RAND 2018 report but did not suggest delaying adoption of Form CRS. See, e.g., Comment Letter of Charles Schwab & Co. Inc. (Dec. 7, 2018) (‘‘Schwab Letter II’’) (‘‘The Commission should acknowledge and act on consensus findings to improve the Form CRS’’); Betterment Letter II (noting that the RAND 2018 report ‘‘demonstrates that Form CRS serves a valuable function’’). See also FSI Letter II (encouraging the Commission to VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 We disagree. The amount of information available from the various investor surveys and investor testing described in this release, including those submitted by commenters, as well as the comment letters and other input submitted to the Commission for this rulemaking, is extensive. We considered all of this information thoroughly, leveraging our decades of experience with investor disclosures, when evaluating changes to the relationship summary from the proposal. The perceived usefulness of the relationship summary, as shown by observations in the RAND 2018 report, surveys and studies submitted by commenters, and input from individual investors at our roundtables and in Feedback Forms, demonstrates that, even as proposed, the relationship summary would benefit investors by providing information that would help investors make more informed choices when deciding among firms and account options.50 Large majorities of participants in the RAND 2018 survey and in other surveys supported the specific topics, such as services, fees, conflicts and standards of conduct, that we require firms to address in the relationship summary.51 Even though the RAND 2018 qualitative interviews and another interview-based study observed that interview participants could have some gaps in understanding, these studies still observed that interview participants could learn new important information from the relationship summary as proposed.52 ‘‘continue investor testing of Form CRS after the final rule is in place’’). 50 See supra footnotes 22 to 30 and accompanying text. We note that the Department of Labor did not describe or reference usability testing in adopting its now vacated rule broadening the definition of fiduciary investment advice under the Employee Retirement Income Security Act of 1974 as amended (‘‘ERISA’’) and the related Best Interest Contract Exemption (‘‘BIC Exemption’’). The BIC Exemption required certain disclosures to be provided to a retirement investor and included on a financial institution’s public website. See DOL, Best Interest Contract Exemption, 81 FR 21002, 21045–52 (Apr. 8, 2016). 51 See supra footnotes 23 to 24 and accompanying text; see also Schwab Letter (Koski), supra footnote 21 (reporting that retail investors say it is most important for firms to communicate about ‘‘costs I will pay for investment advice,’’ a ‘‘description of advice services,’’ the ‘‘obligations the firm and its representatives owe me’’ and any ‘‘conflicts of interest related to the advice I receive’’); CCMC Letter (investor polling), supra footnote 21 (reporting as issues that ‘‘matter most’’ to investors, ‘‘explaining fees and costs,’’ explaining conflicts of interest’’ and ‘‘explaining own compensation’’). 52 See RAND 2018, supra footnote 13 (describing that participants in qualitative interviews had difficulty reconciling the information provided in the obligations section and conflicts of interest section and other areas of confusion, but concluding that ‘‘[p]articipants demonstrated evidence of learning new information from the PO 00000 Frm 00183 Fmt 4701 Sfmt 4700 33499 In addition, as noted above and discussed in further detail below, we are making a number of modifications designed to improve the relationship summary relative to the proposal, which are informed by these and other observations reported by RAND 2018 and other surveys and studies, as well as by investor feedback at roundtables and in Feedback Forms and the other comment letters we have received. For example, we are substantially revising our approach to disclosing standard of conduct and conflicts of interest to make this information clearer to retail investors, including (among other changes) eliminating the word ‘‘fiduciary’’ and requiring firms— whether broker-dealers, investment advisers, or dual registrants—to use the term ‘‘best interest’’ to describe their applicable standard of conduct.53 Further, as compared to the proposal, modifications adopted in the final relationship summary instructions require less prescribed wording, and instead, firms will generally use their own wording to address required topics, which creates flexibility in providing accurate information to investors. We believe that this modification substantially limits the practicability and benefit of additional usability testing because there is no single version of the relationship summary (or a limited set of form versions) that may be used to gauge investor comprehension given firms’ flexibility to tailor their relationship summary.54 relationship summary’’); Kleimann I, supra footnote 19 (although study author concluded that, overall, participants had difficulty with ‘‘sorting out similarities and differences,’’ the study reports that ‘‘nearly all participants easily identified a key difference between Brokerage Accounts and Advisory accounts as the fee structure;’’ ‘‘[p]articipants expected to pay for transactions in a Brokerage Account or the quarterly fee for an Advisory Account;’’ ‘‘most participants understood that both Brokerage Accounts and Advisory Accounts could have financial relationships with other companies that could be potential conflicts with clients’ best interests’’ and ‘‘[nearly all participants saw the Key Questions as essential . . . straightforward and raised important questions that they themselves might not have thought to ask.’’); see also Betterment Letter I (Hotspex) supra footnote 18 (83% of respondents correctly identified as ‘‘true’’ a statement that ‘‘some investment firms have a conflict of interest because they benefit financially from recommending certain investments’’ when viewing a version of the standalone adviser relationship summary constructed based on the instructions set forth in the proposal). 53 See infra, Section II.B.3. 54 In this regard, the RAND 2018 report and surveys and studies submitted by commenters generally were based on sample versions of the relationship summary that we included in the proposal. Alternate designs tested by commenters generally used the all of the same topics (e.g., a description of service and the relationship, fees and E:\FR\FM\12JYR2.SGM Continued 12JYR2 33500 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 Therefore, we believe that any anticipated benefit from continued rounds of investor usability testing does not justify the cost to investors of delaying a rulemaking designed to increase investor protection. Accordingly, we believe that the totality of input received through comments (including Feedback Forms), outreach at roundtables and through the OIAD/RAND and RAND 2018 reports, as well as surveys and studies submitted by commenters, fully supports our consideration and adoption of the relationship summary, with modifications informed by this input as discussed more fully below. However, to help ensure that the relationship summary fulfills its intended purpose, we have directed our staff to review a sample of relationship summaries that are filed with the Commission beginning after June 30, 2020, when firms first file their relationship summaries, and to provide the Commission with the results of this review. The Commission and its staff are also reviewing educational materials provided on Investor.gov and intend to develop additional content in order to continue to improve the information available to investors about working with investment advisers, brokerdealers, individual financial professionals, and investing. In the Proposing Release, we proposed certain disclosures to be included in all print or electronic retail investor communications by brokerdealers, investment advisers, and their financial professionals (the ‘‘Affirmative Disclosures’’). We have determined not to adopt the Affirmative Disclosures, as we discuss further below. In our view, the combination of the disclosure requirements in Form CRS and Regulation Best Interest should adequately address the objectives of the proposed Affirmative Disclosures. costs, standard of care, conflicts, additional information and key questions) as the proposed sample versions, with changes using different versions of prescribed wording and formatting designed to be more appealing to readers. See Kleimann II, supra footnote 19 (describing alternative Form CRS design assumptions) and Betterment Letter I (Hotspex) supra footnote 18 (describing approach to optimizing the Form CRS). Given modifications that we are adopting to the Form CRS instructions that provide firms more flexibility to use their own wording to describe service offerings, fees and costs and their conflicts of interest and more flexibility in formatting as compared to the proposal, we are not preparing sample or illustrative versions of the relationship summary that could be used to repeat such surveys and testing, and we do not believe that we would be able to develop sample versions that would be representative given the diversity among firms in their service and product offerings. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 II. Form CRS Relationship Summary A. Presentation and Format The relationship summary is designed to be a short and accessible disclosure for retail investors that helps them to compare information about firms’ brokerage and/or investment advisory offerings and promotes effective communication between firms and their retail investors.55 The proposed instructions included requirements on length, formatting, and content. The proposal also provided three examples of what a relationship summary might look like for a standalone broker-dealer, standalone investment adviser, and dual registrant. In providing feedback on the proposed sample relationship summaries, commenters on Feedback Forms and participants in the RAND 2018 survey and other surveys and studies provided by commenters indicated that the proposed relationship summary could be too dense and difficult to read.56 They suggested using simpler terms and more white space, among other changes.57 Commenters 55 Form CRS defines ‘‘relationship summary’’ as ‘‘[a] disclosure prepared in accordance with these Instructions that you must provide to retail investors’’ and also references Advisers Act rule 204–5 and Exchange Act rule 17a–14. Firms that do not have any retail investors to whom they must deliver a relationship summary are not required to prepare or file one. See General Instructions to Form CRS, Advisers Act rule 204–5, Exchange Act rule 17a–14(a). 56 See Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Questions 1 and 4) (33 commenters (35%) answered ‘‘Somewhat’’ or ‘‘No’’ in either of Question 3(a) (Do you find the format of the Relationship Summary easy to follow?) or Question 3(c) (Is the Relationship Summary easy to read?); comments responding to Question 4 (‘‘Are there topics in the relationship summary that are too technical or that could be improved?’’); 41 Feedback Forms (44%) indicated in response to Question 4 or another question that the relationship summary was too technical or suggested one or more topics that could be improved); see also RAND 2018, supra footnote 13 (on average, 24% of respondents described any given section as difficult or very difficult, more than 30% described the fees and costs section as difficult or very difficult; but qualitative interview discussions revealed that there were areas of confusion for participants, including differences between account types or financial professionals); Betterment Letter I (Hotspex) supra footnote 18 (only 22% of respondents reviewing a version of the standalone adviser relationship summary said information was easy to understand; only 18% said the format was appealing); Kleimann I, supra footnote 19 (finding that participants were confused). Cf. Cetera Letter II (Woelfel), supra footnote 17 (more than 75% of respondents strongly or somewhat agreed that individual topics covered by the relationship summary were described clearly). See also comments discussed supra footnote 35. 57 Comment Letter of Front Street Consulting (Jun. 8, 2018) (stating that disclosure must be readable and understandable using plain language); Kleimann II, supra footnote 19 (describing design and content principles for a redesigned relationship summary, noting that ‘‘[h]eading and white space PO 00000 Frm 00184 Fmt 4701 Sfmt 4700 also encouraged the use of design principles that would result in a more visually appealing and accessible disclosure.58 In addition, the IAC recommended, through a majority vote, uniform, simple, and clear summary disclosures to retail investors.59 We have incorporated many of these suggestions into the instructions. We are changing the instructions to require a question-and-answer format, give additional support for electronic formats, provide guidance that firms should include white space, and implement other design features to make the relationship summary easier to read.60 We are requiring firms to use standardized headings in a prescribed order to preserve comparability, while permitting greater flexibility in other aspects of the relationship summary’s wording and design to enhance the relationship summary’s accuracy, usability, and effectiveness.61 The final instructions will require limited prescribed wording compared to the allow readers to have an overview of the content, see the overall structure of the content, and choose which parts most interest them . . .’’); IAA Letter I (recommending flexibility for innovative use of design techniques including ‘‘using more white space, and using visuals like icons and images’’); Fidelity Letter (discussing designed relationship summary using ‘‘key design elements that are informed by our experienced employees whose focus is on graphic design and applying design thinking techniques to customer facing products’’). Schwab Letter I (Koski), supra footnote 21 (reporting that the ‘‘majority of retail investors surveyed want communications that are relevant to them (91%), short and to the point (85%), and visually appealing (79%)’’); Schwab Letter II (stating that combined results of RAND 2018 and its own survey indicate that the Form CRS should be shorter, organized around questions, focus on ‘‘fees/costs’’ and ‘‘services/relationships’’ and contain ‘‘hyperlinks’’); Betterment Letter I (Hotspex), supra footnote 18 (providing suggestions for streamlining and focusing the content requirements and improving the visual layout and format of the relationship summary to improve its effectiveness). 58 See, e.g., Betterment Letter II (‘‘The form should better implement design principles that have been shown to facilitate visual appeal and comprehension.’’); Schwab Letter I (citing to a presentation given by Kleimann Communication Group, Inc., at an IAC meeting on June 14, 2018); IAA Letter I (arguing that more visually dynamic and engaging design would make the relationship summary more effective and likely to be read). 59 See IAC Form CRS Recommendation, supra footnote 10 (reiterating a recommendation from the IAC Broker-Dealer Fiduciary Duty Recommendations in 2013 to ‘‘adopt a uniform, plain English disclosure document to be provided to customers and potential customers of brokerdealers and investment advisers that covers basic information about the nature of services offered, fees and compensation, conflicts of interest, and disciplinary record’’ and recommending that the Commission work with a design expert and test the relationship summary for effectiveness). 60 General Instruction 2.A. to Form CRS. (‘‘You should include white space and implement other design features to make the relationship summary easy to read.’’). 61 See, e.g., Items 2.B. and 3.C.(ii) of Form CRS. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 proposal and will permit firms to use their own wording to describe most topics. We also are not requiring firms to discuss the sub-topics required within each section in a prescribed order, as proposed.62 Dual registrants 63 and affiliated brokerage and investment advisory firms also will have flexibility to decide whether to prepare separate or combined relationship summaries. These changes are intended to enhance the relationship summary’s clarity, usability, and design, and to promote effective communication and understanding between retail investors and their firms and financial professionals. We describe these changes in more detail below. We are also adopting some parts of the instructions that address presentation and formatting as proposed. The instructions state that the relationship summary should be concise and direct, and firms must use plain English and take into consideration retail investors’ level of financial experience, as proposed.64 Firms also are not permitted to use multiple negatives, or legal jargon or highly technical business terms unless firms clearly explain them, as proposed. In a change from the proposal, the instructions will not permit use of legal jargon or technical terms without explaining them in plain English, even if the firm believes that reasonable retail investors will understand those terms.65 62 See Proposed General Instruction 1.(b) to Form CRS (‘‘Unless otherwise noted, you must also present the required information within each item in the order listed.’’). 63 Form CRS defines ‘‘dual registrant’’ as ‘‘A firm that is dually registered as a broker or dealer registered under section 15 of the Exchange Act and an investment adviser registered under section 203 of the Advisers Act and offers services to retail investors as both a broker-dealer and an investment adviser.’’ General Instruction 11.C. to Form CRS. This definition varies from the one proposed in that it includes only those investment advisers registered with the SEC, rather than with the States. For the avoidance of doubt, it also includes the statutory registration provisions for broker-dealers and investment advisers. 64 See General Instruction 2.A. to Form CRS (providing that firms should (i) use short sentences and paragraphs; (ii) use definite, concrete, everyday words; (iii) use active voice; (iv) avoid legal jargon or highly technical business terms unless firms clearly explain them; and (v) avoid multiple negatives. Firms must write their responses to each item as if speaking to the retail investor, using ‘‘you,’’ ‘‘us,’’ ‘‘our firm,’’ etc.). Delivery of the relationship summary will not necessarily satisfy the additional requirements that broker-dealers and investment advisers have under the federal securities laws and regulations or other laws or regulations. See General Instruction 2.D. to Form CRS; Proposed General Instruction 3 to Form CRS. 65 General Instruction 2.A. to Form CRS. Compare to Proposed General Instruction 2 to Form CRS (‘‘. . . avoid legal jargon or highly technical terms unless you clearly explain them or you believe that reasonable retail investors will understand them . . .’’). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 Several commenters suggested that the relationship summary avoid the use of jargon (e.g., terms like ‘‘asset-based fee’’ and ‘‘load’’ in the fees section),66 and several roundtable participants and participants in the RAND 2018 interviews and another study said that they did not understand certain technical terms.67 Roundtable participants and commenters on Feedback Forms asked that the relationship summary include definitions or a glossary.68 In addition, the IAC recommended that a document such as the relationship summary use plain English and a concise format.69 As a result, we are instructing firms to avoid using legal jargon and highly technical terms in the relationship summary unless they are able to explain the terms in the space of the relationship summary. We believe this simpler approach obviates the need for firms to justify what they believe a reasonable retail investor would or would not understand. Firms would have the flexibility to use their own wording, including legal or highly technical terms as long as they explain them, or may prefer to use simpler terms, given the space limitations of the relationship summary. Additionally, we have added a cover page for Form CRS under the Exchange Act (17 CFR 249.640) only, displaying a currently valid OMB control number and including certain statements relating to federal information law and requirements, and the SEC’s collection of information.70 1. Limited Prescribed Wording The proposed instructions would have required firms to include prescribed wording throughout many sections of the relationship summary. In Letter I; AARP Letter; IAA Letter I. e.g., Miami Roundtable; Houston Roundtable; Philadelphia Roundtable; RAND 2018, supra footnote 13 (in qualitative interviews participants asked for definitions of ‘‘transactionbased fee,’’ ‘‘asset-based fee,’’ and struggled with terms such as ‘‘mark-up,’’ ‘‘mark-down,’’ ‘‘load,’’ surrender ‘‘charges’’ and ‘‘wrap fee’’); see also Kleimann I, supra footnote 19. 68 See, e.g., Philadelphia Roundtable, at 64 (participant recommending a glossary at the end of the relationship summary); Washington, DC Roundtable, at 31 (‘‘You might want to consider a glossary of terms.’’); Feedback Forms Comment Summary, supra footnote 11 (summary of comments to Question 4) (10 comments asked for a definition or a better explanation of the term ‘‘fiduciary,’’ seven asked for definitions of terms such as transaction-based fee, asset-based fee or wrap fee); see also Anonymous 18 Feedback Form (‘‘A glossary would be nice—not in ‘‘legalize’’ [sic] language’’). 69 See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10; and IAC Form CRS Recommendation, supra footnote 10. 70 Under the Advisers Act, Form CRS is Part 3 of Form ADV, which already contains a cover page. PO 00000 66 CFA 67 See, Frm 00185 Fmt 4701 Sfmt 4700 33501 particular, the fees and costs, standard of conduct, and the comparison section for standalone broker-dealers and investment advisers included a number of required statements, many that differed for broker-dealers, investment advisers, and dual registrants.71 The introduction, conflicts of interest, and key questions sections also included some required statements.72 In response to comments (as described more fully below) we are largely eliminating the prescribed wording and replacing those statements with instructions that generally allow firms to describe their own offerings with their own wording. For example, the proposed instructions would have required broker-dealers to state, ‘‘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’’ and ‘‘The fee you pay is based on the specific transaction and not the value of your account.’’ 73 Broker-dealers also would have stated ‘‘The more transactions in your account, the more fees we charge you. We therefore have an incentive to encourage you to engage in transactions.’’ 74 Instead the final instructions will require broker-dealers to describe the principal fees and costs that retail investors will incur, including their transaction-based fees, and summarize how frequently the fees are assessed and the conflicts of interest they create.75 Many commenters requested more flexibility for firms to provide accurate descriptions of their services.76 Some 71 See infra discussion at Sections II.B.3 (fees and costs and standard of conduct) and II.B.6 (proposed items omitted in final instructions). 72 See infra discussion at Sections II.B.1 (introduction) and II.B.3 (conflicts of interests) and supra Section II.A.4 (conversation starters). 73 Proposed Items 2.B.1. and 4.B.1. of Form CRS. 74 Proposed Item 4.B.5. of Form CRS. 75 See Items 3.A. through 3.C. of Form CRS. 76 See, e.g., IAA Letter I; Comment Letter of Massachusetts Mutual Life Insurance Company (Aug. 7, 2018) (‘‘MassMutual Letter’’); Comment Letter of the Association for Advanced Life Underwriting (Aug. 7, 2018) (‘‘AALU Letter’’); Comment Letter of Prudential Financial, Inc. (Aug. 7, 2018) (‘‘Prudential Letter’’); Comment Letter of Mutual of America Life Insurance Company (Aug. 3, 2018) (‘‘Mutual of America Letter’’); Comment Letter of John Hancock Life Insurance Company (U.S.A.) (Aug. 3, 2018) (‘‘John Hancock Letter’’); ACLI Letter; Comment Letter of New York Life Insurance Company (Aug. 7, 2018) (‘‘New York Life Letter’’); Comment Letter of Transamerica (Aug. 7, 2018) (‘‘Transamerica Letter’’); Vanguard Letter. See also Betterment Letter I, supra footnote 18 (arguing that investor survey conducted by Hotspex showed that its more customized version of the relationship summary facilitated investor understanding). Some individuals submitting Feedback Forms also preferred more firm-specific information. See, e.g., Anonymous 13 Feedback Form (‘‘Firm-specific info would be nice on this document.’’); Bhupalam Feedback Form (‘‘I would like to see additional E:\FR\FM\12JYR2.SGM Continued 12JYR2 33502 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 argued that the mix of prescribed and firm-authored wording required by the proposed instructions would be inaccurate, contribute to investor confusion, or be ineffective for investors, particularly language that some commenters considered ‘‘boilerplate.’’ 77 Observations reported in the RAND 2018 qualitative interviews and other surveys and studies also showed that investors had difficulty understanding, were confused by, or misinterpreted some of the prescribed wording.78 A range of commenters asserted that the proposed prescribed wording could be inaccurate or inapplicable.79 For example, various providers of insurance products explained that references to brokerage or investment advisory accounts were not consistent with their business models and could confuse retail investors because customers generally purchase insurance products directly from the issuer, without needing to open a information regarding specific firm rather than a general description.’’); Christine Feedback Form (‘‘I’m interested in my individual advisor’s orientation—small cap, mid cap, large cap or mix growth vs. value foreign, domestic or mix fundamental or quantitative long term or short term’’). 77 ASA Letter (‘‘[T]he mix of prescribed and customized language will only create more confusion and complexity, as well as legal risk for financial institutions.’’); Primerica Letter (‘‘This mix of prescribed and flexible disclosure would ultimately result in a patchwork of new disclosures that fail to comprehensively describe a particular firm’s business model in a way that is accessible and digestible by retail investors.’’); IAA Letter I (‘‘Many firms would . . . be compelled to explain to prospective clients how and why their business is different from the boilerplate descriptions and why the comparisons are not applicable. The boilerplate language may thus detract from a firm’s ability to explain its own services and make it harder for investors to understand those services.’’). 78 E.g., RAND 2018, supra footnote 13 (describing that, in qualitative interviews, participants noted some words or phrases that needed further definition and some misunderstood differences between account types and professionals); Kleimann I, supra footnote 19; Betterment Letter I (Hotspex) supra footnote 18 (finding that investors had difficulty understanding certain key information on the SEC sample version of standalone investment adviser relationship summary); see also Kleimann II, supra footnote 19 (investors misconstrued the legal standard in alternative versions of prescribed wording used in a redesigned version of the relationship summary); Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 4) (41 Feedback Forms included narrative responses that indicated that one or more topics were too technical or could be improved; of these, 20 indicated that the relationship summary language was too technical, wordy, confusing or should be simplified; 23 indicated that information on fees and costs was too technical or needed to be more clear; 23 suggested that information in sections on relationships and services and obligations needed clarification, and 14 suggested clarification or more information about conflicts of interest). 79 See, e.g., IAA Letter I; ACLI Letter; AARP Letter; SIFMA Letter; FSI Letter I; Triad Letter; Vanguard Letter. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 brokerage account.80 One commenter expressed concern that some of the prescribed wording could constitute impermissible compelled speech that could raise First Amendment concerns.81 That same commenter, with others, also opposed providing firms with more flexibility than proposed to implement the relationship summary, arguing that more flexibility could impair comparability.82 We recognize that extensive use of prescribed wording in certain contexts could add to investor confusion and may not accurately or appropriately capture information about particular firms. Accordingly, the final instructions permit firms, within the parameters of the instructions, to describe their services, investment offerings, fees, and conflicts of interest using their own wording. This approach should enable firms to reflect accurately what they offer to retail investors, should result in disclosures that are more useful to retail investors, and should mitigate concerns relating to the mix of prescribed and firm-authored wording, and the extensive use of prescribed wording, that the proposed instructions required. Although we are allowing more flexibility so that firms can describe their offerings more accurately, firms still will be required to discuss required topics within a prescribed order, as discussed below.83 This approach will facilitate transparency, consistency, and comparability of information across the relationship summaries of different firms, helping retail investors to focus on information that we believe would be particularly helpful in deciding among firms, financial professionals, services, and accounts—namely: Relationships and services; fees, costs, conflicts, and required standard of conduct; disciplinary history; and how to get additional information. We believe that more tailored, specific, and distinct information in the required topic areas also will better serve the educational 80 See, e.g., Comment Letter of the Committee of Annuity Insurers (Aug. 7, 2018) (‘‘Committee of Annuity Insurers Letter’’) (‘‘The use of the term ‘brokerage account may be confusing to retail investors purchasing and owning annuities, as annuities are typically ‘held’ directly by an insurance company.’’); ACLI Letter; IAA Letter I; FSI Letter I; Comment Letter of Lincoln Financial Group (Nov. 13, 2018) (‘‘Lincoln Financial Group Letter’’) (‘‘Sales of variable annuities, and variable life insurance products, typically do not involve the opening of a brokerage account and are not conducted in a brokerage account.’’). 81 See CFA Letter I, supra footnote 37. 82 See AFL–CIO, CFA Letter. 83 See, e.g., General Instructions 1.A and 1.B., and 2.B. to Form CRS. PO 00000 Frm 00186 Fmt 4701 Sfmt 4700 purpose by facilitating more robust substantive comparisons across firms. This approach addresses—and mitigates—First Amendment concerns. Generally, the instructions no longer require any specific speech.84 Rather, they permit firms to use their own words to impart accurate information to investors. In certain circumstances, however, we are continuing to require firms to use prescribed wording. For example, the final instructions require firms to use standardized headings and conversation starters, which are in the form of questions that investors are encouraged to ask.85 These elements are organizational (the headings) or intended to prompt a discussion by the investor (the conversation starters).86 The final instructions also require firms to include prescribed statements describing their required standard of conduct when providing recommendations or advice.87 Requiring firms to provide a consistent articulation of their required legal obligations in this regard will reduce and minimize investor confusion, as compared with allowing firms to state their required standard of conduct using their own wording.88 These statements are designed to require the disclosure of purely factual information about the standard of conduct that applies to the provision of recommendations by broker-dealers and the provision of advice by investment advisers under their respective legal regimes.89 Finally, the instructions require firms to include a prescribed, factual statement regarding the impact of fees and costs on investments, and a prescribed statement encouraging retail investors to understand what fees and costs they are paying.90 As explained further below, 84 For example, the final instructions no longer require the proposed Comparisons section or other prescribed wording that could be perceived as requiring firms to compare their owns services unfavorably to those of their competitors. See infra Section II.B.6. 85 See infra Sections II.A.2 and II.A.4. 86 See infra Sections II.A.2. and II.A.4. 87 Item 3.B.(i) of Form CRS. See infra Section II.B.3.b. 88 See infra Sections II.A.2 and II.B.3.b. 89 See Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 249–50 (2010) (upholding against First Amendment challenge a requirement that lawyers disclose their ‘‘legal status’’ and ‘‘the character of the assistance provided’’); Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 651 (1985) (upholding required disclosure of factual information about terms of service); Pharm. Care Mgmt. Ass’n v. Rowe, 429 F.3d 294, 310 (1st Cir. 2005) (upholding requirement that pharmacy benefit managers disclose conflicts of interest and financial arrangements). 90 See Item 3.A.(iii) of Form CRS (requiring firms to state, ‘‘You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 the final instructions provide that if a required disclosure or conversation starter is inapplicable to a firm’s business or specific wording required by the instructions is inaccurate, firms may omit or modify it.91 As in the proposal, the final instructions include parameters for the scope of information expected within the relationship summary, though we are modifying the requirements to clarify the scope further in light of commenter concerns. First, all information in the relationship summary must be true and may not omit any material facts necessary in order to make the disclosures, in light of the circumstances under which they were made, not misleading.92 The proposed instructions required all information in the relationship summary to be true and prohibited firms from omitting any material facts necessary to make the disclosures required by the instructions and the applicable item not misleading, but did not include the clause ‘‘in light of the circumstances under which they were made.’’ 93 Commenters raised concerns with respect to the applicability of this standard to a short document with strict page limits that is meant to provide only a brief summary of information.94 on your investments over time. Please make sure you understand what fees and costs you are paying.’’). See also infra footnotes 424–425 and accompanying text. 91 See General Instruction 2.B to Form CRS. We are adopting this provision to ensure that firms are not compelled to include wording in their relationship summaries that is misleading or inaccurate in the context of their business models. This provision may apply in limited circumstances. For example, the headings and conversation starters prescribed by the final instructions are worded at a highly generalized level and cover selected key topics that are broadly applicable to broker-dealers and investment advisers and their relationships with retail investors, irrespective of business model (i.e., relationships and services the firm offers to retail investors, fees and costs that retail investors will pay, specified conflicts of interest and standards of conduct, and disciplinary history). 92 General Instruction 2.B. to Form CRS (‘‘All information in your relationship summary must be true and may not omit any material facts necessary in order to make the disclosures required by these Instructions and the applicable Item, in light of the circumstances under which they were made, not misleading.’’). Cf. Proposed Instruction 3 to Form CRS (‘‘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.’’). 93 Proposed General Instruction 3 to Form CRS. 94 See, e.g., LPL Financial Letter (raising concerns that the relationship summary raises the risk of liability for material omissions given its page limits and required level of detail); CCMC Letter (‘‘The page and length limitations imposed by the proposed regulation, coupled with the required disclosure that is mandated by the proposed rules, present a substantial risk of liability for omissions that may be necessary only to ensure the disclosure meets the Commission’s strict formatting VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 We continue to believe that firms should include only as much information as is necessary to enable a reasonable investor 95 to understand the information required by each item.96 As discussed below, we believe that investors will benefit from receiving a relationship summary containing highlevel information that they will be more likely to read and understand, with the ability to access more detailed information.97 As a result, we recognize a firm’s relationship summary by itself is a summary of the information required to inform retail investors about the services a firm provides along with its fees, costs, conflicts of interest, and standard of conduct. We also believe that the disclosure provided in the relationship summary should be responsive and relevant to the topics covered by the final instructions,98 and not omit information that is required to be disclosed or necessary to make the required disclosure not misleading.99 requirements.’’); Fidelity Letter (stating that firms ‘‘would find it very challenging to summarize their offerings within the four-page limit and other content and formatting constraints of the form as proposed, let alone to do so in a manner that provides sufficient detail to convey meaningful information to investors, and is sufficiently accurate to avoid creating liability for a misstatement’’). 95 The proposed instructions referred to a ‘‘reasonable retail investor.’’ For example, under the proposed instructions, firms would have been able to omit or modify prescribed wording or other statements required to be part of the relationship summary if such statements were inapplicable to a firm’s business or would have been misleading to a ‘‘reasonable retail investor.’’ See Proposed General Instruction 3 to Form CRS. The final instructions no longer make reference to a ‘‘reasonable retail investor.’’ By eliminating the reference to a ‘‘reasonable retail investor,’’ we are clarifying that we did not intend at the proposal, and do not intend now, to introduce a new standard under the federal securities laws, which generally refer to what a ‘‘reasonable investor’’ would consider important in making a decision. See infra footnotes 95–105 and accompanying text. References to a ‘‘reasonable retail investor’’ in the proposed instructions were meant to clarify how the operative Instruction or Item would apply in the context of a retail investor. Because new rule 17a– 14 under the Exchange Act and new rule 204–5 under the Advisers Act require firms to deliver relationship summaries to retail investors in accordance with such rules, we do not believe such clarifications are necessary. 96 General Instruction 2.A. to Form CRS. The instructions remind firms to use not only short sentences as proposed, but also short paragraphs. General Instruction 2.A.(i) to Form CRS. 97 See infra Section II.A.3. 98 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, including statements made in response to the relationship summary’s ‘‘conversation starters.’’ See infra Section II.B.2.c. 99 This approach is consistent with the approach the Commission has taken with respect to disclosure more broadly. See, e.g., rule 408(a) under PO 00000 Frm 00187 Fmt 4701 Sfmt 4700 33503 We are sensitive to commenters’ concerns, however, regarding expectations for the scope of required information within page limits. In this regard, the instructions continue to provide, as proposed, that firms may not include a disclosure in the relationship summary other than a disclosure that is required or permitted by the instructions and the applicable item,100 and that all the information contained in the relationship summary must be true.101 In a change from the proposal, and to address commenters’ concerns, the final instructions provide that the information contained in the relationship summary may not omit any material facts necessary in order to make the disclosures, in light of the circumstances under which they were Regulation C [17 CFR 230.408(a)] (‘‘In addition to the information expressly required to be included in a registration statement, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading’’); Exchange Act rule 12b–20 [17 CFR 240.12b–20] (‘‘In addition to the information expressly required to be included in a statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading’’); see also Commission Statement and Guidance on Public Company Cybersecurity Disclosures, Securities Act Release No. 82746 (Feb. 21, 2018) [83 FR 8166 (Feb. 26, 2018)] (stating that the ‘‘Commission considers omitted information to be material if there is a substantial likelihood that a reasonable investor would consider the information important in making an investment decision or that disclosure of the omitted information would have been viewed by the reasonable investor as having significantly altered the total mix of information available’’); TSC Industries v. Northway, 426 U.S. 438, 449 (1976) (stating a fact is material ‘‘if there is a substantial likelihood that a reasonable shareholder would consider it important’’ in making an investment decision or if it ‘‘would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available’’ to the shareholder); Basic, Inc. v. Levinson, 485 U.S. 224, 240 (1988) (stating that ‘‘materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information’’); Securities and Exchange Com’n v. Texas Gulf Sulphur, 258 F. Supp. 262, 279 (S.D.N.Y. 1966) (stating that ‘‘[a]n insider’s liability for failure to disclose material information which he uses to his own advantage in the purchase of securities extends to purchases made on national securities exchanges as well as to purchases in ‘face-to-face’ transactions’’); Cochran v. Channing Corporation, 211 F. Supp. 239, 242 (S.D.N.Y. 1962) (stating that the ‘‘Securities Exchange Act was enacted in part to afford protection to the ordinary purchaser or seller of securities. Fraud may be accomplished by false statements, a failure to correct a misleading impression left by statements already made or, as in the instant case, by not stating anything at all when there is a duty to come forward and speak’’). 100 General Instruction 1.B. to Form CRS; see also Proposed General Instruction 1.(d) to Form CRS. 101 General Instruction 2.B. and 2.C. to Form CRS; see also Proposed General Instruction 3 to Form CRS. E:\FR\FM\12JYR2.SGM 12JYR2 33504 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations made, not misleading.102 We have added the phrase ‘‘in light of the circumstances under which they were made’’ to clarify that the content included or not included in the relationship summary should be viewed, for example, in light of the fact that the disclosure is intended to be a summary, that firms must adhere to the page limit, and that there will be links to additional information. Any information contained in the relationship summary or omitted facts will not be viewed in isolation in respect of determining whether such information would have been viewed by a reasonable investor as having significantly altered the total mix of information available.103 As discussed below, firms will provide additional detail and context through layered disclosure. For example, the instructions require firms to include specific references or a link to additional information as part of the relationships and services and fees and conflicts sections.104 In other instances, the instructions encourage firms to reference or link to additional information to supplement their required disclosures.105 While this change from the proposal is drawn from other areas of the federal securities laws,106 Form CRS is not intended to create a private right of action. Second, firms may omit or modify required disclosures or conversation starters that are inapplicable to their business, or specific wording required by the final instructions that is inaccurate.107 The proposed instructions permitted firms to omit or modify required disclosures that were inapplicable to their business or would be misleading to a reasonable retail investor.108 We modified the proposed jbell on DSK3GLQ082PROD with RULES2 102 Id. 103 See rule 10b–5 under the Exchange Act [17 CFR 240.10b–5]; supra footnote 99 and accompanying text; see also footnote 469 and accompanying text. 104 See infra Section II.A.3. 105 See, e.g., General Instruction 3.A. to Form CRS (‘‘You are encouraged to use charts, graphs, tables, and other graphics or text features in order to respond to the required disclosures. . . . You also may include: (i) A means of facilitating access to video or audio messages, or other forms of information (whether by hyperlink, website address, Quick Response Code (‘‘QR code’’), or other equivalent methods or technologies); (ii) mouse-over windows; (iii) pop-up boxes; (iv) chat functionality; (v) fee calculators; or (vi) other forms of electronic media, communications, or tools that designed to enhance a retail investor’s understanding of the material in the relationship summary.’’). 106 See supra footnotes 99 and 103 and accompanying text. 107 General Instruction 2.B. to Form CRS. 108 See Proposed General Instruction 3 to Form CRS (‘‘If a statement is inapplicable to your VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 instruction to provide a more concrete requirement allowing firms to omit or modify prescribed wording, rather than using a broader standard referencing a reasonable retail investor. This instruction is intended to ensure that no statements are misleading or inaccurate in the context of a firm’s particular services or business. Rather, the objective of the Commission is to ensure that required disclosures are purely factual and provide investors with an accurate portrayal of the firm’s services and operations. Finally, given that firms will use mostly their own wording, we are adding instructions that remind firms that their responses must be factual and provide balanced descriptions to help retail investors evaluate the firm’s services.109 For example, firms may not include exaggerated or unsubstantiated claims, vague and imprecise ‘‘boilerplate’’ explanations, or disproportionate emphasis on possible investments or activities that are not made available to retail investors.110 The relationship summary is designed to serve as disclosure, rather than marketing material, and should not unduly emphasize aspects of firms’ offerings that may be favorable to investors over those that may be unfavorable. 2. Standard Question-and-Answer Format and Other Presentation Instructions As with the proposed instructions, the final instructions require firms to present information under standardized headings and to respond to all the items in the final instructions in a prescribed order.111 Instead of using declarative headings as proposed, however, the headings will be in the form of questions.112 This change responds to feedback from surveys and studies 113 and commenters,114 including many business or would be misleading to a reasonable retail investor, you may omit or modify that statement.’’). 109 General Instruction 2.C. to Form CRS. 110 General Instruction 2.C. to Form CRS. 111 General Instruction 1.B. to Form CRS. 112 See generally Items 2.A., 3.A., 3.B., 3.C, and 4.A to Form CRS. 113 See e.g.; RAND 2018, supra footnote 13 (reporting that about 60% of survey respondents preferred a question-and-answer format over the sample relationship summary format presented in the survey). Kleimann I, supra footnote 19 (‘‘Participants liked the Key Questions section, but wanted the questions to be answered within the document.’’). 114 IAA Letter I (‘‘A [question-and-answer] format will help keep the relationship summary short and should also remove the onus of the retail investor having to ask questions. This format would encourage further conversation, particularly if the Commission requires firms to point investors to PO 00000 Frm 00188 Fmt 4701 Sfmt 4700 submitting their own mock-ups of the relationship summary that suggested or used a question-and-answer format in their own documents. Several commenters noted that the questionand-answer format is a more effective design for consumer disclosures because it focuses on questions to which a consumer wants answers and allows a consumer to skim quickly and understand where to get more information.115 Based on consideration of these comments, we are both incorporating the format generally and are utilizing several of the question headings suggested by commenters in mock-ups, as discussed in each item below. In addition to the standardized headings, we continue to believe that a prescribed order of topics facilitates comparability of different firms’ relationship summaries. Commenters generally supported or did not oppose the premise of a prescribed order of topics.116 Some commenters did, however, suggest changes to the organization or inclusion of topics, either explicitly in their comment letters, implicitly by the design of their own mock-ups, or both.117 Results of additional information—including comparison information and other key questions—on the SEC’s website.’’); Schwab Letter I (citing Kleimann Communication Group, Inc., Making Disclosures Work for Consumers (Jun. 14, 2018), available at https://www.sec.gov/spotlight/investor-advisorycommittee-2012/iac061418-slides-by-susankleimann.pdf, and contemporaneous discussions); Schwab Letter II (‘‘Form CRS should be organized around questions’’); Fidelity Letter (redesigned relationship summary with a question-and-answer format). 115 See Kleimann II, supra footnote 19 (‘‘Readers ask questions when they read, especially of functional documents . . . . For good design, we want to build upon this tendency by identifying the key questions investors should or are likely to ask and featuring them prominently in the text, thus easing the cognitive task for readers.); Schwab Letter I (‘‘[Q]uestions that a consumer has . . . should be the organizing principle.’’); see also CFA Letter I. 116 See, e.g., Trailhead Consulting Letter (supporting a standardized order of topics to facilitate comparability); Fidelity Letter (‘‘[W]e urge the SEC to consider prescribing content and topics, but not specific language . . .’’). 117 See, e.g., CFA Letter I (suggesting changes to the order of the disclosures and the design of the relationship summary); IAA Letter I (suggesting a different order of topics and elimination of the Comparisons section, including by submitting its own mock-up); Comment Letter of Charles Schwab & Co., Inc. (Feb. 26, 2019) (‘‘Schwab Letter III’’) (providing sample Form CRS instructions that permit flexibility as to the order of sub-topics under each topic). On Feedback Forms, 57 (about 60%) commenters responded ‘‘yes’’ when asked whether information was in the appropriate order; 8 commenters suggested moving the Key Questions to be first or closer to the front of the document. See Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Questions 3(b) and 7). A few commenters on Feedback Forms suggested moving the Additional Information E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 surveys and studies that assessed comprehension of the sample proposed relationship summaries demonstrated the importance of context and revealed confusion caused by the placement of some information. For example, the RAND 2018 qualitative interviews suggested that investors were confused by and had difficulty reconciling the conflicts and standard of conduct sections, which were separated by the fees and comparisons sections.118 Another study suggested that the appearance of fee information in three separate sections and separation of the fees and conflicts sections by the comparisons section inhibited understanding of the connection between fees and conflicts.119 As discussed further below, we are combining the proposed Fees and Costs, Conflicts of Interest, and Standard of Conduct sections into one, to address these comments.120 In addition, in response to suggestions that we provide more flexibility for how firms describe their services so that they can more accurately convey the information, the final instructions do not require firms to present the information within each section in the order listed.121 Therefore, firms are free to discuss the required sub-topics within each item in an order that they believe best promotes accurate and readable descriptions of their business. The final instructions provide for page limits to promote brevity, as proposed. The proposed instructions limited the length of the relationship summary to four pages for both standalone firms and dual registrants.122 The final instructions provide that for dual registrants that include their brokerage services and advisory services in a single relationship summary, the relationship summary must not exceed four pages in paper format, or the equivalent if delivered electronically.123 section forward. See Durgin Feedback Form, Salkowitz Feedback Form, Starmer2 Feedback Form, Anonymous14 Feedback Form, and a few suggested changes to the order of discussion of obligations and conflicts. See Anonymous28 Feedback Form, Asen Feedback Form, Lee2 Feedback Form. 118 See RAND 2018, supra footnote 13. 119 See Kleimann I, supra footnote 19, at 30 (participants ‘‘had difficulty building knowledge and relating one piece to another when it was separated by physical space.’’). 120 See Item 3 of Form CRS. 121 See Proposed General Instruction 1.(b) to Form CRS (‘‘Unless otherwise noted, you must also present the required information within each item in the order listed.’’). 122 Proposed General Instruction 1.(c) to Form CRS. 123 General Instruction 1.C. to Form CRS. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 For broker-dealers 124 and investment advisers 125 a relationship summary in paper format must not exceed two pages, or the equivalent if delivered electronically.126 Dual registrants that prepare separate relationship summaries for their brokerage and advisory services are limited to two pages each, or the equivalent if delivered electronically.127 Unlike the proposed instructions, the final instructions do not prescribe paper size, font size, and margin width, providing instead that they should be reasonable.128 For example, we believe that 81⁄2″ x 11″ paper size, at least an 11 point font size, and a minimum of 0.75″ margins on all sides, as proposed, could be considered reasonable, but other parameters could also be reasonable. The objective of the proposed paper, font, and margin size limitations was to make the relationship summary easy to read. We expect that a visually engaging and effective design, including in electronic format, could achieve the same objective without the prescriptive limitations. Many commenters preferred a shorter, one-to-two page document more heavily relying on layered disclosure with increased use of hyperlinks and other cross-references to more detailed disclosure.129 Commenters also said that Form CRS defined ‘‘standalone broker-dealer’’ as ‘‘a broker or dealer registered under section 15 of the Exchange Act that offers services to retail investors and (i) is not dually registered as an investment adviser under section 203 of the Advisers Act or (ii) is dually registered as an investment adviser under section 203 of the Advisers Act but does not offer services to retail investors as an investment adviser.’’ We are not adopting this definition because we believe using the term ‘‘broker-dealer’’ is sufficient for the final instructions. The final instructions provide that Form CRS applies to broker-dealers registered under section 15 if the Exchange Act. See supra footnote 8. 125 Proposed Form CRS defined ‘‘standalone investment adviser’’ as ‘‘an investment adviser registered under section 203 of the Advisers Act that offers services to retail investors and (i) is not dually registered as a broker or dealer under Section 15 of the Exchange Act or (ii) is dually registered as a broker or dealer under Section 15 of the Exchange Act but does not offer services to retail investors as a broker-dealer.’’ We are not adopting this definition because we believe using the term ‘‘investment adviser’’ is sufficient for the final instructions. See supra footnote 8. Furthermore, the final instructions specify that Form CRS applies to investment advisers registered under section 203 of the Advisers Act. 126 General Instruction 1.C. to Form CRS. 127 General Instruction 1.C. to Form CRS. We discuss additional considerations and requirements for dual registrants and affiliates in Section II.A.5 below. 128 General Instruction 1.C. to Form CRS. 129 See, e.g., Schwab Letter I (‘‘Form CRS should simply be a short navigation aid to the existing Form ADV Part 2 disclosure’’ for investment advisers or ‘‘to additional information readily available on the firm’s website or enclosed with the account documentation’’ for broker-dealers.); FSI PO 00000 124 Proposed Frm 00189 Fmt 4701 Sfmt 4700 33505 investors are more likely to read a shorter document.130 Several commenters submitted mock-ups that were shorter than four pages.131 Others indicated that the length of Form CRS was acceptable but should not exceed four pages.132 On the other hand, certain commenters suggested that the length of the relationship summary may be too short to appropriately describe firms’ insurance services or products.133 One commenter said that it would be challenging for dual registrants to summarize all of their offerings within the four-page limit.134 Investor feedback from surveys, studies, roundtables, and Feedback Forms also did not show consistent results. For example, 57% of the RAND 2018 survey respondents indicated that the proposed relationship summary was too long, 41% said it was about right, and roughly 2% said it was too short.135 In section-by-section questioning, however, the most common response from RAND 2018 survey respondents was to keep the section length as is.136 Similarly, some roundtable participants provided feedback that the proposed length was right at the maximum, ‘‘about right,’’ or ‘‘good,’’ 137 whereas others would have preferred a shorter document.138 About Letter I (‘‘While we support the Commission’s efforts to ensure concise disclosure by limiting the required Form CRS to four pages (or its electronic equivalent), we suggest an even shorter document (perhaps as short as one page) with hyperlinks to more detailed disclosures.’’); see also AARP Letter; Better Markets Letter; Comment Letter of the Teachers Insurance and Annuity Association of America (Aug. 7, 2018) (‘‘TIAA Letter’’); Bank of America Letter; CCMR Letter; LPL Financial Letter; Kleimann II, supra footnote 19 (‘‘Form CRS should be as short as possible.’’). 130 See Fidelity Letter; see also Schwab Letter I (Koski), supra footnote 21 (85% of survey participants answered that they would be more likely to read disclosure that is short and to the point with links to more information; 61% answered that they would be less likely to read a document that is longer and more comprehensive, but 31% answered that they would be more likely to read a longer and more comprehensive disclosure); Comment Letter of Glen Strong (Jul. 27, 2018). 131 See, e.g., Schwab Letter I; Fidelity Letter; IAA Letter I. 132 See Cambridge Letter; Comment Letter of Morningstar, Inc. (Aug. 7, 2018) (‘‘Morningstar Letter’’); Trailhead Consulting Letter. 133 See, e.g., ACLI Letter; MassMutual Letter. 134 See Fidelity Letter. 135 RAND 2018, supra footnote 13. 136 RAND 2018, supra footnote 13; see also Cetera Letter II (Woelfel), supra footnote 17 (when asked generally how the relationship summary could be improved, 10% of survey respondents said relationship summary could be shorter). 137 Washington, DC Roundtable, at 18, 26. 138 See Philadelphia Roundtable, at 5, 19 (noting that lengthy disclosure ‘‘actually prevents investor interest and really understanding more. If something like [the relationship summary] can replace the 200 pages and then you have access to E:\FR\FM\12JYR2.SGM Continued 12JYR2 33506 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 40% of commenters on Feedback Forms said that relationship summary was an appropriate length, while about 30% indicated a preference for a shorter document.139 In light of commenter and investor feedback, we have determined that the relationship summary should be no more than four pages, and that in many cases a document shorter than four pages is appropriate. As proposed, both standalone firms and dual registrants were subject to a four-page limit, even though a dual registrant may have to include more disclosures discussing its advisory business and brokerage business as compared with standalone firms. Upon further consideration of the comments advocating for a more streamlined disclosure that includes more white space, we are adopting a four-page limit for dual registrants that prepare one combined relationship summary, to permit them to capture all of the required information within twice as much space as for standalone firms. If dual registrants and affiliated 140 standalone firms choose to prepare separate relationship summaries for their brokerage and investment advisory services, each relationship summary should not exceed two pages.141 The two-page limit will help to facilitate comparison of the dual registrant’s services, as investors can easily review the separate relationship summaries side-by-side, and will encourage firms to focus on succinctly and clearly explaining the required information. Some commenters, including providers of insurance products, supported a longer relationship summary or expressed concern that four pages would not be enough to allow for a summary of all of their offerings.142 We believe that the elimination of certain sections (such as the comparison section) 143 and most of the prescribed wording from the relationship summary, along with the flexibility firms will have under the final instructions to describe the 200 pages if you want them, that’s a better system’’). 139 See Feedback Forms Comment Summary (summary of responses to Question 6), supra footnote 11. 140 Form CRS defines an ‘‘affiliate’’ as ‘‘Any persons directly or indirectly controlling or controlled by you or under common control with you.’’ General Instruction 11.A. to Form CRS. 141 General Instruction 1.C. to Form CRS (‘‘Dual registrants and affiliates that prepare separate relationship summaries are limited to two pages for each relationship summary. . . . If delivered electronically, the relationship summary must not exceed the equivalent of two pages or four pages in paper format, as applicable.’’). 142 See supra footnotes 133–134 and accompanying text. 143 See infra Section II.B.6 (Proposed Items Omitted in Final Instructions). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 services with their own wording, and to omit or modify required disclosures or conversation starters that are inapplicable to their business or specific wording that is inaccurate, should help to alleviate the concerns of those who advocated for the relationship summary to be longer. 3. Electronic and Graphical Formats, and Layered Disclosure We are adding instructions that clarify our support for firms wishing to use electronic media in preparing the relationship summary for retail investors.144 The proposed instructions would have permitted firms to add embedded hyperlinks within the relationship summary in order to supplement required disclosures 145 and would have required firms to use hyperlinks for any document that is cross-referenced in any electronic relationship summary.146 The proposed instructions also permitted firms to use various graphics or text features to explain the required information but did not reference whether they should be electronic- or paper-based.147 Many commenters supported electronic formats, including in connection with layered disclosure.148 One commenter endorsed electronic, including mobile, formats as inherently easier to navigate and use in a layered approach and asserted that the 144 Delivery is discussed in Section II.C. Firms may deliver electronic versions of the relationship summary in accordance with the final instructions and the Commission’s guidance regarding electronic delivery. See General Instructions 10.B. through 10.D. to Form CRS. 145 Proposed General Instruction 1.(g) to Form CRS (‘‘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.’’). 146 Proposed General Instruction 1.(g) to Form CRS (‘‘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.’’). 147 Proposed General Instruction 1.(f) to Form CRS (‘‘You may use charts, graphs, tables, and other graphics or text features to respond 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.’’). 148 See, e.g., IAA Letter I (‘‘Each key point should be made as simply and succinctly as possible, and the investor should then be pointed clearly and directly to specific additional plain English disclosure explaining the point . . . . This approach would also provide firms with the flexibility they need to use innovative design and delivery techniques.’’). PO 00000 Frm 00190 Fmt 4701 Sfmt 4700 relationship summary would be more engaging to investors, and thus more effective as a disclosure, if the Commission encouraged more creative use of electronic formats.149 Research submitted by commenters and feedback from our investor roundtables indicated that investors preferred a more visually appealing disclosure.150 Commenters recommended a more visually-focused and designed experience, and many mock-ups that commenters submitted used graphics and other design features extensively.151 In addition, the IAC has recommended exploring the use of layered disclosure in certain contexts.152 The IAC has also recommended that the Commission ‘‘continue to explore methods to encourage a transition to electronic delivery that respect investor preferences and that increase, rather than reduce, the likelihood that investors will see and read important disclosure documents.’’ 153 Some commenters also expressed support for the IAC’s recommendation relating to electronic delivery.154 Accordingly, we are adopting and adding provisions to the proposed 149 See IAA Letter I. Betterment Letter I (Hotspex), supra footnote 18 (reporting study authors’ conclusions that survey respondents found a version of the standalone adviser relationship summary ‘‘more appealing and understandable,’’ where Betterment revised the form to ‘‘[i]mprove visual hierarchy (e.g., layout, shading, shorten and standardize paragraph lengths to improve legibility, appeal and retention of information’’); Schwab Letter I (Koski), supra footnote 21(79% of survey respondents said they are more likely to read disclosure that is ‘‘visually appealing and did not seem like a legal document’’); Washington, DC Roundtable, at 20; Atlanta Roundtable, at 35. 151 See, e.g., CFA Letter I; Fidelity Letter (citing to Stanford Law School Design Principles, Use visual design and interactive experiences, to transform how you present legal info to lay people, available at https://www.legaltechdesign.com/ communication-design); Betterment Letter I (mockup); SIFMA Letter; IAA Letter I; Schwab Letter I; see also Kleimann II, supra footnote 19 (describing design assumptions for a redesigned version of the relationship summary). 152 See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10 (in connection with the disclosure of disciplinary history, the Commission ‘‘should look at whether it might be beneficial to adopt a layered approach to such disclosures, with the goal of developing a more abbreviated, user-friendly document for distribution to investors’’). 153 Investor Advisory Committee, Recommendation of the Investor as Purchaser Subcommittee: Promotion of Electronic Delivery and Development of a Summary Disclosure Document for Delivery of Investment Company Shareholder Reports (Dec. 7, 2017), available at https://www.sec.gov/spotlight/investor-advisorycommittee-2012/recommendation-promotion-ofelectronic-delivery-and-development.pdf (‘‘IAC Electronic Delivery Recommendation’’). 154 See, e.g., FSI Letter I; Cambridge Letter; Comment Letter of the Institute for Portfolio Alternatives (Aug. 7, 2018) (‘‘Institute for Portfolio Alternatives Letter’’). 150 See E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 instructions to encourage the use of electronic formatting and graphical, text, online features and layered disclosures in preparing their relationship summaries.155 Key elements of the final instructions include the following: • The instructions encourage (rather than just permit, as proposed) firms to use graphics or text features to respond to the required disclosures, or to make comparisons among their offerings, including by using charts, graphs, tables, text colors, and graphical cues, such as dual-column charts.156 If the chart, graph, table, or other graphical feature is self-explanatory and responsive to the disclosure item, additional narrative language that may be duplicative is not required. For a relationship summary provided electronically, the instructions further encourage online tools that populate information in comparison boxes based on investor selections.157 • The instructions reference a nonexhaustive list of electronic media, communications, or tools that firms may use in their relationship summary.158 We are including an instruction that, in a relationship summary that is posted on a firm’s website or otherwise provided electronically, firms must provide a means of facilitating access (e.g., hyperlinking) to any information 155 We created a separate section in the instructions focused on electronic and graphical formats that includes these instructions. 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.’’). 156 See General Instruction 3.A. to Form CRS (‘‘You are encouraged to use charts, graphs, tables, and other graphics or text features to respond to the required disclosures. You are also encouraged to use text features, text colors, and graphical cues, such as dual-column charts, to compare services, account characteristics, investments, fees, and conflicts of interest.’’). 157 See General Instruction 3.A. to Form CRS (‘‘For a relationship summary that is posted on your website or otherwise provided electronically, we encourage online tools that populate information in comparison boxes based on investor selections.’’). 158 General Instruction 3.A. to Form CRS (‘‘You also may include: (i) A means of facilitating access to video or audio messages, or other forms of information (whether by hyperlink, website address, Quick Response Code (‘‘QR code’’), or other equivalent methods or technologies); (ii) mouse-over windows; (iii) pop-up boxes; (iv) chat functionality; (v) fee calculators; or (vi) other forms of electronic media, communications, or tools designed to enhance a retail investor’s understanding of the material in the relationship summary.’’). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 that is referenced in the relationship summary if the information is available online.159 For relationship summaries delivered in paper format, firms may include URL addresses, QR codes, or other means of facilitating access to such information.160 This instruction permits layered disclosure through paper disclosures and hybrid paper and electronic deliveries, while supporting some investors’ preference for paper. • The instructions provide guidance that firms may include instructions on the use and interpretation of interactive graphics or tools, as proposed.161 We believe that these features can make the relationship summary more engaging, accessible, and effective in communicating to retail investors.162 • The instructions replace the term ‘‘hyperlink’’ with the more evergreen concept of ‘‘a means of facilitating access,’’ which will include hyperlinks as well as website addresses, QR Codes, or other equivalent methods or technologies.163 Expanding the types of 159 General Instruction 3.B. to Form CRS. (‘‘In a relationship summary that is posted on your website or otherwise provided electronically, you must provide a means of facilitating access to any information that is referenced in the relationship summary if the information is available online, including, for example, hyperlinks to fee schedules, conflicts disclosures, the firm’s narrative brochure required by Part 2A of Form ADV, or other regulatory disclosures.’’). 160 General Instruction 3.B. to Form CRS. (‘‘In a relationship summary that is delivered in paper format, you may include URL addresses, QR codes, or other means of facilitating access to such information.’’). 161 General Instruction 3.C. to Form CRS. Instructions that firms provide on the use and interpretation of interactive graphics or tools would not be subject to the page limitation for relationship summaries under General Instruction 1.C to Form CRS, but should be succinct, consistent with General Instruction 2.A. 162 Similar to the proposed instructions, the final instructions include the caveat that these graphical and text features and electronic media, communications, or tools, (i) must be responsive to and meet the requirements in these instructions for the particular item in which the information is placed; and (ii) may not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. General Instruction 3.C. to Form CRS. Cf. 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.’’). We deleted the reference in the proposed instructions to ‘‘is not inaccurate or misleading’’ because it is covered by another instruction. 163 See, e.g., General Instruction 3.A. to Form CRS (‘‘You also may include: (i) A means of facilitating access to video or audio messages, or other forms of information (whether by hyperlink, website address, Quick Response Code (‘‘QR code’’), or other equivalent methods or technologies’’); General PO 00000 Frm 00191 Fmt 4701 Sfmt 4700 33507 technology referenced in the instructions will make them more relevant as new technologies continue to be developed. A number of commenters suggested different approaches for whether we would treat the relationship summary as ‘‘incorporating by reference’’ information provided in additional disclosures or materials that are hyperlinked to or otherwise accessible from the relationship summary.164 Some of these commenters suggested that we treat certain hyperlinked information as ‘‘incorporated by reference.’’ 165 Other commenters recommended that firms should be permitted, but not necessarily required, to incorporate in the relationship summary additional information provided in other documents.166 Instruction 3.B. to Form CRS (‘‘In a relationship summary that is posted on your website or otherwise provided electronically, you must provide a means of facilitating access to any information that is referenced in the relationship summary if the information is available online, including, for example, hyperlinks to fee schedules, conflicts disclosures, the firm’s narrative brochure required by Part 2A of Form ADV, or other regulatory disclosures.).’’ Cf. Proposed General Instruction 1.(g) to Form CRS (‘‘In a relationship summary that is posted on your website or otherwise provided electronically, you must use hyperlinks for any document that is crossreferenced in the relationship summary if the document is available online.’’). 164 See, e.g., Comment Letter of Cetera Financial Group (Aug. 7, 2018) (‘‘Cetera Letter I’’); IRI Letter; Schwab Letter I; Schwab Letter III (providing sample Form CRS instructions permitting incorporation of materials by reference); Comment Letter of The National Society of Compliance Professionals (Aug. 7, 2018) (‘‘NSCP Letter’’); Schnase Letter; LPL Financial Letter. 165 Schwab Letter I (with respect to brokerdealers, Form CRS should navigate investors to additional information readily available on the firm’s website or enclosed with account information, and the additional information would be considered incorporated by reference); NSCP Letter (firms should be permitted to incorporate by reference public disciplinary disclosure events); Schnase Letter (‘‘Firms that follow the SEC rules in filing, posting and linking should get the full antifraud benefit of the information in the Firm Brochure being deemed ‘‘delivered’’ when the Relationship Summary is delivered, without having to resort to arcane and outmoded language and concepts such as ‘‘incorporation by reference.’’). 166 See Cetera Letter I (suggesting that firms ‘‘should be permitted to incorporate other information in Form CRS by reference without reproducing the specified information in its’ [sic] entirety, so long as the location is reasonably accessible to the public and the other sources of information are sufficient to meet the standards of Form CRS’’); IRI Letter (the Commission should ‘‘permit (but not require) firms to use incorporation by reference to satisfy particular components of the disclosures required under Regulation Best Interest and/or Form CRS. In other words, if an investor already receives a particular piece of information in an existing disclosure document (including disclosures required under the federal securities laws, SEC or FINRA rules, ERISA, or DOL rules) the firm should be permitted to merely reference that existing document (with sufficient information for investors to locate or obtain that document.’’). E:\FR\FM\12JYR2.SGM 12JYR2 33508 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 As discussed above, we support the use of layered disclosure and believe that investors will benefit greatly from receiving a relationship summary containing high-level information that they will be more likely to read and understand, with the ability to access more detailed information. Layered disclosure is an approach that can balance the goal of keeping the relationship summary short and accessible with the goal of providing retail investors with fulsome and specific information. The relationship summary is intended to be a selfcontained document, however, and firms should be able to meet the instructions’ requirements by providing generalized and summary responses to each item, without relying on incorporation by reference to other documents providing additional information. In contrast with other disclosure obligations such as prospectuses and registration statements, a firm could not satisfy the disclosure requirements set forth in the relationship summary instructions by incorporating another document (such as the Form ADV Part 2A brochure) by reference. At the same time, we recognize the communicative value of layered disclosure. The instructions provide, as discussed above, that firms may 167 (and in some cases must) 168 cross-reference other documents and use hyperlinks or other tools to give more details about the topic. Where firms link to content outside the relationship summary disclosure, whether on a permissive or mandatory basis, the information may not substitute for providing any narrative descriptions that the instructions require, and the additional information should be responsive and relevant to the topic covered by the instruction. Firms should be mindful that the antifraud standards under the federal securities laws apply to linked 167 See, e.g., General Instruction 3.A. to Form CRS (‘‘You also may include: (i) A means of facilitating access to video or audio messages, or other forms of information (whether by hyperlink, website address, Quick Response Code (‘‘QR code’’), or other equivalent methods or technologies); (ii) mouse-over windows; (iii) pop-up boxes; (iv) chat functionality; (v) fee calculators; or (vi) other forms of electronic media, communications, or tools designed to enhance a retail investor’s understanding of the material in the relationship summary.’’). 168 See, e.g., Item 3.A.(iii) of Form CRS (‘‘You must include specific references to more detailed information about your fees and costs that, at a minimum, include the same or equivalent information to that required by the Form ADV, Part 2A brochure (specifically Items 5.A., B., C., and D.) and Regulation Best Interest, as applicable.’’). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 information, as with other securities law disclosures. All together we believe encouraging the use of electronic and graphical formatting online features, and layered disclosures will permit firms to create innovative disclosures that engage investors. 4. Conversation Starters Consistent with the proposal, the relationship summary will be required to contain suggested follow-up questions for retail investors to ask their financial professional. The relationship summary, however, will not include a separate section of ‘‘Key Questions to Ask,’’ at the end of the relationship summary, as proposed. Instead, firms will be required to integrate those ‘‘key questions’’ for retail investors to ask their financial professionals throughout the relationship summary as headings to items or as ‘‘conversation starters.’’ The proposed relationship summary would have required firms to include ten questions, as applicable to their particular business, under the heading ‘‘Key Questions to Ask’’ after a statement that the retail investors should ask their financial professional the key questions about a firm’s investment services and accounts.169 In addition, we proposed to allow firms to include up to four additional frequently asked questions.170 Most comment letters that discussed the ‘‘Key Questions to Ask’’ section generally did not support the proposed approach of including a separate section of up to fourteen questions at the end of the relationship summary. Commenters who proposed keeping a key questions section typically suggested significant substantive or stylistic alterations.171 In a separate approach, many commenter mock-ups included topics and questions from ‘‘Key Questions to Ask’’ in a question-and-response format throughout the relationship summary.172 Several commenters suggested that the key questions be removed from the relationship summary and placed on the Commission’s website with other educational materials.173 Proposed Item 8 of Form CRS. id. 171 See, e.g., CFA Institute Letter I (suggesting interspersing questions through sections of Form CRS rather than including at the end); SIFMA Letter (suggesting that firms only be required to answer ‘‘four to five’’ questions to make the communication ‘‘shorter and more meaningful’’ to investors). 172 See, e.g., IAA Letter I; Comment Letter of the Institute for the Fiduciary Standard (Aug. 6, 2018) (‘‘IFS Letter’’); LPL Financial Letter; Schwab Letter I. 173 See, e.g., ACLI Letter; IAA Letter I; LPL Financial Letter. One commenter representing PO 00000 169 See 170 See Frm 00192 Fmt 4701 Sfmt 4700 Observations reported in the RAND 2018 report and other surveys and studies, and individual investor feedback at roundtables and on Feedback Forms generally indicated, that retail investors found the key questions helpful, however. In the RAND 2018 survey, the ‘‘Key Questions to Ask’’ section received the highest support of all sections to ‘‘keep as is’’ when investors were asked if they would add more detail, keep as is, shorten, or delete the section, and a majority of RAND 2018 survey respondents also indicated that they were either ‘‘very comfortable’’ or ‘‘somewhat comfortable’’ with asking each of the key questions.174 Surveys and studies submitted by commenters also indicated that most investors who reviewed one of the proposed sample relationship summaries found the suggested questions to be useful and said they were likely to ask the questions.175 In addition, the ‘‘Key Questions to Ask’’ section received the most ‘‘very useful’’ ratings from commenters who submitted Feedback Forms, and narrative comments on several Feedback Forms specifically indicated that the questions would encourage discussion with financial professionals.176 Similarly, investors at investors argued that the Commission was betterplaced to provide information on topics covered in the ‘‘Key Questions to Ask’’ section because financial professionals would have ‘‘room for obfuscation’’ in their discussions with retail investors. See CFA Letter I. 174 See RAND 2018, supra footnote 13. RAND 2018 also reports that, in qualitative interviews, ‘‘[m]ost interview participants said that they liked all of the questions, that they would ask these questions in meeting with a financial service provider, and did not suggest dropping any of the questions.’’ 175 See Betterment Letter I (Hotspex) supra footnote 18 (82% of respondents viewing a version of the investment-adviser relationship summary found the suggested questions to be very or somewhat useful and 93% were very or somewhat likely to ask the questions); Cetera Letter II (Woelfel) supra footnote 17 (85% of survey participants who viewed the sample dual-registrant relationship summary found the key questions to be ‘‘very’’ or ‘‘somewhat’’ important to cover, and 84% ‘‘strongly’’ or ‘‘somewhat’’ agreed that the key questions described their topics clearly); Kleimann I, supra footnote 19 (‘‘Nearly all participants saw the Key Questions as essential. They felt the questions were straight forward and raised important questions . . . Many said they would use the set of questions in their next exchange with their broker or adviser.’’). 176 See Feedback Forms Comment Summary, supra footnote 11 (51 commenters (55%) responded to Question 2(g) that the Key Questions section was ‘‘very useful’’ and 28 (30%) responded that the Key Questions section was ‘‘useful’’; in comparison, other sections were scored as ‘‘very useful’’ in the range of 31% to 44%; similarly, more than 75% of Feedback Forms included a narrative response to Question 7 or other response indicating that the Key Questions were useful; 11 narrative responses included specific comments agreeing that the Key Questions would encourage discussions with E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 Commission-held roundtables indicated that they viewed the questions as helpful.177 In light of comments, we believe that including questions for investors to ask their financial professionals is an important component of the relationship summary. Several commenter mock-ups showed questions throughout the relationship summary grouped by subject matter rather than at the end of the document. Investor studies showed that proximity and context are important for questions an investor may have for a financial professional.178 In addition, some commenters’ Feedback Forms requested that questions be placed earlier in the relationship summary document; one specifically suggested that we put the questions with ‘‘the appropriate section [with] each section to which it applies.’’ 179 We have determined to follow a similar approach by replacing the Key Questions to Ask section with specified ‘‘conversation starters’’ throughout the document. We are also using some of the proposed questions as topic headings. There are required questions as conversation starters in each section other than the Introduction.180 These conversation starters are intended to cover the same topics as the proposed key questions and in many cases are substantially similar in wording to the proposed key questions.181 For each conversation starter, firms must use text features to make the conversation financial professionals; and two others stated more generally that the relationship summary would encourage dialogue). 177 See, e.g., Atlanta Roundtable (three investors responded positively to a question as to whether the key questions were helpful, with no dissent to that view); Houston Roundtable (one investor responding that ‘‘the questions for me are very, very good.’’). 178 See Kleimann I, supra footnote 19; Kleimann II, supra footnote 19 (each recommending questionand-answer format in part to place relevant information together). 179 See Feedback Forms Comment Summary, supra footnote 1111 (summary of responses to Question 7); Hoggan Feedback Form (‘‘Maybe you should question at the end of each section—to help frame the issue’’); see also Hawkins Feedback Form (commenting on obligations section that ‘‘[g]iving some examples of types of questions to ask would be beneficial’’). 180 See Items 2.D. (relationships and services); 3.A.(iv) and 3.B.(iii) (fees, costs, conflicts, and standard of conduct); 4.D.(ii) (disciplinary history); and 5.C. (additional information) of Form CRS. 181 For example, the proposed Key Question 6 (‘‘How will you choose investments to recommend for my account?’’) has been included in the final relationship summary as a conversation starter to the Relationships and Services section (‘‘How will you choose investments to recommend to me?’’). For discussion of additional conversation starter questions, see infra Section II.A.4 See also Proposed Item 8.6 of Form CRS and Item 2.D.(iv) of Form CRS. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 starters more noticeable and prominent in relation to the other discussion text. For example, they may use larger or different font; a text box around the heading or questions; bolded, italicized, or underlined text; or lines to offset the questions from other sections.182 We believe the questions will be more helpful to investors when included throughout the document with formatting highlighting the conversation starters and organizing the conversation starters together with the firm’s disclosures about a particular topic, providing retail investors clearer context for each question. However, if a required conversation starter is inapplicable to the firm’s business, the firm may omit or modify that conversation starter.183 With these changes, we believe that the conversation starters will better help retail investors initiate and engage in useful and informative conversations with their investment professionals. As proposed, investment advisers that provide only automated investment advisory services or broker-dealers that provide services only online without a particular individual with whom a retail investor can discuss the conversation starters must include a section or page on their website that answers each of the conversation starter questions and must provide in the relationship summary a means of facilitating access (e.g., by providing a hyperlink) to that section or page.184 For example, a firm could include a hyperlink, QR Code, or some other equivalent methods or technologies that would enable a retail investor to access that information. One commenter requested clarification that all firms could provide retail investors with the answers to each key question in writing, and then investors could call a call center for follow-up questions.185 All firms could choose to provide written answers to conversation starters, but the final instructions will only require written responses in these limited circumstances to ensure that retail investors receive responses when they do not have access to a financial General Instruction 4.A. to Form CRS. General Instruction 2.B. to Form CRS. 184 General Instruction 4.B. to Form CRS. As proposed, such advisers or broker-dealers would have provided a hyperlink in the relationship summary to the appropriate section or page. See Proposed Item 8 of Form CRS. In response to comments supporting electronic access more broadly, we broadened the instruction to allow for other means of facilitating access. We also changed the term ‘‘automated advice’’ from the proposed instructions to ‘‘automated investment advisory services’’ in the final instructions to underscore the ongoing nature of the investment advisory relationship. 185 See LPL Financial Letter. PO 00000 182 See 183 See Frm 00193 Fmt 4701 Sfmt 4700 33509 professional to ask questions. We continue to believe that the requirement as adopted will encourage investor engagement and make the conversation starters useful where there is no firm representative to answer the question in-person (or by telephone) for the retail investor. In addition, as proposed, if the firm provides automated investment advisory or brokerage services, but also makes a financial professional available to discuss the firm’s services with a retail investor, the firm must make the financial professional available to discuss the conversation starters with the retail investor.186 Six of the proposed key questions will continue to have analogous ‘‘conversation starter’’ questions in the final Form CRS, which we discuss in each applicable section below.187 These questions cover services, fees and costs, conflicts, disciplinary information, and information about appropriate contact persons. As described below, we revised the wording for all of these questions. We did not replace four of the key questions with analogous ‘‘conversation starter’’ questions; the topics raised by these key questions will be addressed in other ways in the relationship summary. First, we have replaced the question requesting financial professionals to ‘‘do the math for me’’ with a different conversation starter.188 Commenters raised specific concerns about this question for operational and recordkeeping reasons.189 We are 186 General Instruction 4.B. to Form CRS. infra Sections II.B.2 (relating to Item 2.D. of Form CRS), II.B.3.a (relating to Item 3.A.(iv) of Form CRS), II.B.3.b (relating to Item 3.B.(iii) of Form CRS); II.B.4 (relating to Item 4.D.(ii) of Form CRS), and II.B.5 (relating to Item 5.C. of Form CRS). 188 See Proposed Item 8.2 of Form CRS (‘‘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?’’). 189 See, e.g., Comment Letter of Edward D. Jones and Co., L.P. (Aug. 7, 2018) (‘‘Edward Jones Letter’’) (‘‘[G]iven the range of services available, it would be very difficult for financial professionals to fully address this question at the outset of the [customer] relationship, particularly for investors selecting transaction-based services.’’); SIFMA Letter (‘‘[M]ost firms do not currently have systems in place to allow the financial professionals to answer questions such as customer-specific ‘Do the math for me’ requests.’’); John Hancock Letter (‘‘We further believe that the costs and operational hurdles associated with providing personalized fee information have been underestimated, and encourage the SEC to provide that any ‘‘do the math’’-type questions may be answered through the use of examples.’’). In part to avoid recordkeeping requirements on behalf of a financial professional, one commenter suggested reframing the questions as reflecting questions back to an investor with a prompt to ask the representative for help if the investor was unsure as to a response to the questions. See Primerica Letter. 187 See E:\FR\FM\12JYR2.SGM Continued 12JYR2 33510 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 instead requiring that firms include a conversation starter question prompting retail investors to ask their financial professional to help them understand how the fees and costs might affect their investments and the potential impact of fees and costs on a $10,000 investment.190 As we note below, our intent with the proposed ‘‘Do the math for me’’ question was that it serve as a prompt to encourage retail investors to ask about the hypothetical amount they would pay per year for an account, what would make the fees more or less, and what services they would receive for those fees. The question was not intended to require firms to generate individualized cost estimates for each particular retail investor. We believe that the newly worded conversation starter makes that more clear. Additionally, the required discussion of fees, costs, and conflicts, together with the conversation starter question, will better serve as an initial basis for understanding how fees affect investment returns and the fees that they will pay than the ‘‘Do the math for me’’ key question.191 Two other proposed key questions regarding costs associated with an account and how firms make money 192 covered information that the relationship summary as adopted requires to be disclosed under the section on fees, costs, conflicts, and standard of conduct.193 Specifically, firms must (i) summarize the principal fees and costs that retail investors will incur from their services (including how frequently they are assessed and the conflicts of interest they create) and (ii) describe any other fees related to their brokerage or investment advisory services in addition to those principal fees that the retail investor will incur.194 Additionally, the new conversation starter question included in Item 3 is intended to elicit similar points of For additional discussion of recordkeeping, see infra Section II.E. 190 See Item 3.A.(iv) of Form CRS. 191 See infra Section II.B.3. 192 See Proposed Items 8.3 (‘‘What additional costs should I expect in connection with my account?’’) and 8.4 (‘‘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?’’) of Form CRS. 193 See Item 3 of Form CRS. The Item 3.C. disclosure combined with the conversation starter included therein would similarly cover information intended to be discussed in response to the fifth proposed key question (‘‘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.’’). See infra Section II.B.3.b. 194 See Items 3.A.(i) and 3.A.(ii) of Form CRS; see also infra Section II.B.3. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 discussion with the following wording: ‘‘Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?’’ Finally, unlike the proposal, the relationship summary must include a description of the ways in which the firm and its affiliates make money from brokerage or investment advisory services and investments it provides to retail investors as well as material conflicts of interest.195 As a result of these disclosure requirements, the separate questions from the proposal are not necessary. Finally, we are not adopting a conversation starter question analogous to the proposed key question asking ‘‘How often will you monitor my account’s performance and offer investment advice?’’, because the Relationships and Services section of the adopted relationship summary requires disclosure about the services and advice or recommendations that firms offer and whether or not they monitor accounts, including the frequency and any material limitations on any such monitoring.196 5. Presentation of Relationship Summaries by Dual Registrants and Affiliated Firms We are modifying the proposed instructions in order to encourage a dual registrant to prepare one combined relationship summary discussing both its brokerage and advisory services, but a dual registrant will be permitted to provide two separate relationship summaries, each describing one type of service.197 The proposal would have required a dual registrant to prepare one relationship summary, presenting most of the required items under standardized headings and in a tabular format, with brokerage services described in one column and advisory services described in another.198 We also are adding a new instruction permitting affiliates to prepare a single relationship summary describing both brokerage and investment advisory services that they offer or to prepare separate relationship summaries, one for 195 See Item 3.B.(ii) of Form CRS; see also infra Section II.B.3. 196 See Item 2.B.(i) of Form CRS (‘‘Explain whether or not you monitor the performance of retail investors’ investments, including the frequency and any material limitations. Indicate whether or not the services described in response to this Item 2.B.(i) are offered as part of your standard services.’’); see also infra Section II.B.2. 197 General Instruction 5.A. to Form CRS. 198 Proposed General Instruction 1.(e) to Form CRS. PO 00000 Frm 00194 Fmt 4701 Sfmt 4700 each type of service.199 In comparison, the proposed instructions did not permit affiliates to deliver one combined relationship summary, but did allow them to state that they offer retail investors their affiliates’ brokerage or advisory services, as applicable.200 We are not adopting the definitions of ‘‘standalone broker-dealer’’ and ‘‘standalone investment adviser’’ as proposed, because they are no longer necessary given the streamlining of the instructions relative to the proposal.201 Under the final instructions, however, we are defining a dual registrant as ‘‘[a] firm that is dually registered as a brokerdealer under section 15 of the Exchange Act and an investment adviser under section 203 of the Advisers Act and offers services to retail investors as both a broker-dealer and an investment adviser’’, substantially as proposed. To clarify, a firm that is dually registered as both a broker-dealer and an investment adviser but does not offer both brokerage and investment advisory services to retail investors would not fall within the definition of dual registrant. For example, a firm that is dually registered and offers investment advisory services to retail investors, but offers brokerage services only to institutional customers, would be required to prepare, file, and deliver the relationship summary only in accordance with the obligations of an investment adviser offering services to retail investors.202 Dual Registrants. Investor studies and surveys showed mixed results in connection with the dual-column, combined relationship summary. For example, when presented with screen shots of each separate section in dualcolumn format, 85% of RAND 2018 survey respondents indicated that the side-by-side comparison format helped them decide whether a broker-dealer or investment adviser account would be right for them, but during qualitative interviews, some participants had difficulty with the two column 199 General Instruction 5.B. to Form CRS. Item 2.D. of Form CRS. This disclosure only applied in the context of an affiliate of the firm. This item was 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. Cf. Comment Letter of Northwestern Mutual Life Insurance Company (Aug. 7, 2018) (‘‘Northwestern Mutual Letter’’) (interpreting Proposed Item 3 to prohibit the mention of affiliate services). 201 See supra footnote 8. 202 See also Advisers Act Rule 204–5; Exchange Act Rule 17a–14(a); General Instructions to Form CRS (‘‘If you do not have any retail investors to whom you must deliver a relationship summary, you are not required to prepare or file one.’’); General Instruction 11.C to Form CRS. 200 Proposed E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 format.203 On Feedback Forms, some indicated that they liked the side-byside or grid presentation.204 One Feedback Form commenter said the dual-column format was confusing, however.205 An interview-based study also indicated that both the formatting and the language in the dual-column format in our proposed sample relationship summary contributed to investor confusion about differences between broker-dealers’ and investment advisers’ services.206 Both industry representatives and commenters representing investors also expressed concerns about the proposed formatting requirements for dual registrants’ relationship summaries.207 Two commenters supported using visual formatting to help investors understand the options dual registrants provide, but argued that the proposed content or design should be changed.208 Several commenters suggested letting dual registrants choose whether to 203 See RAND 2018, supra footnote 13, at 22; see also id., at 46 (‘‘Some participants grasped that the document was organized into two columns, each corresponding to an account type. Some others did not realize this immediately but grasped it once it was pointed out by an interviewer.’’). 204 See, e.g., Anonymous03 Feedback Form (‘‘a side by side chart with u’s [sic] to say which type of account offers which service’’); Anonymous14 Feedback Form (‘‘recommend chart structure’’); Anonymous28 (‘‘Presenting the differences in parallel columns gives the best chance for people new ot [sic] investing to understand what is involved’’); Baker Feedback Form (‘‘the double column format, comparing the two classes, was clear and easy to follow’’); and Smith1 Feedback Form (‘‘I like the side by side comparisons’’). 205 See Anonymous02 Feedback Form (‘‘Maybe a bit hard to read the columns.’’). 206 See Kleimann I, supra footnote 19, at 30–31 (‘‘Most participants tried to read the CRS by looking first at one column, usually the Broker Dealer Services, and then at the second column . . . when they turned to the second column they then tried to match the bullets . . . . Sometimes this matching was relatively easy to do, as in the Types of Relationships and Services section because the bullets aligned almost exactly. They struggled and found the misaligned bullets confusing in subsequent sections . . . Some participants simply took information from the first bullet they read or from bolded words or phrases.’’). 207 See AARP Letter; CFA Letter I; TIAA Letter; Fidelity Letter; MassMutual Letter; LPL Financial Letter; SIFMA Letter; Comment Letter of BlackRock, Inc. (Aug. 7, 2018) (‘‘BlackRock Letter’’) (expressing concern that investors may be confused if dual registrants were required to disclose all of their advisory and brokerage services in a single relationship summary); see also Schwab Letter II (‘‘Dual-registrant firms recommend flexibility because of real-world concerns that the side-by-side comparison will not be effective.’’). 208 See AARP Letter (‘‘[a]lthough the visual formatting is helpful, the substantive information laid out within the table remains technical and is likely to be confusing to the average retail investor’’); CFA Letter I (emphasizing that investors must see all available options in order to make an informed decision, and that the Commission consult with disclosure design experts toward developing a form that is most likely to result in informed investor choice.’’). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 prepare one combined relationship summary or two separate ones.209 Commenters argued that providing information about both brokerage and investment advisory services as proposed would confuse investors.210 Another suggested requiring dual registrants to prepare and deliver different relationship summaries to retail investors depending on whether the investors enter into an advisory or brokerage relationship, and to highlight the availability and link to the relationship summary of the other type of service.211 One commenter argued that dual registrants needed flexibility to maintain two separate disclosures to allow each financial professional associated with the dual registrant to provide a tailored disclosure to his/her customer, without including services that he/she is not licensed to provide.212 We encourage dual registrants to prepare a single disclosure, designed in a manner that facilitates comparison between their brokerage and advisory services. Informed by comments, we have determined that two separate disclosures might be appropriate, depending on the different ways firms and their financial professionals offer services and on the particular facts and circumstances. For example, financial professionals with licenses to offer services as a representative of a brokerdealer and investment adviser may offer services through a dual registrant, affiliated firms, or unaffiliated firms, or only offer one type of service notwithstanding their dual licensing.213 Financial professionals who are not dually licensed may offer one type of service through a firm that is dually registered. Accordingly, the final instructions permit dual registrants and affiliates to prepare a single relationship summary, or alternatively, two separate ones, to describe their brokerage and investment advisory services in a way that accurately reflects their business models and will be the most helpful to retail investors. The instructions explicitly encourage preparation of a single relationship summary, however, 209 See Schwab Letter III (providing sample Form CRS instructions that permit dual registrants either to prepare a single, comparative relationship summary, or two separate relationship summaries describing each type of service and providing links to each other); TIAA Letter; Fidelity Letter; MassMutual Letter; LPL Financial Letter; SIFMA Letter; BlackRock Letter. 210 See, e.g., TIAA Letter (a combined relationship summary would confuse customers of dually registered firms that provide only one type of service and would overwhelm them with information not relevant to the relationship); LPL Financial Letter; SIFMA Letter; BlackRock Letter. 211 See IAA Letter I. 212 See MassMutual Letter. 213 See, e.g., LPL Financial Letter. PO 00000 Frm 00195 Fmt 4701 Sfmt 4700 33511 given that a number of investors and commenters reacted positively to this presentation.214 A firm preparing a single relationship summary will be required to employ design elements of its own choosing to promote comparability; however, we are not prescribing the two-column format, as proposed. We agree that making retail investors aware of a range of options is important to help them make an informed choice,215 but we recognize the potential limits of a tabular format, as illustrated by results from some investor studies and surveys,216 and we have concluded that firms are generally in a better position than the Commission to determine a format and design that facilitates comparison of their specific brokerage and investment advisory services. Whether a firm prepares a single relationship summary or two separate ones, the final instructions require a firm to present the information with equal prominence and in a manner that clearly distinguishes and facilitates comparison of the two types of services.217 For example, a firm could use a tabular format; text features such as text boxes; bolded, italicized, or underlined text; or lines to clearly indicate similarities and differences in its services. While we are providing this flexibility, we believe investors should see a range of options. Accordingly, the final instructions provide that a firm preparing two separate relationship summaries must provide a means of facilitating access to each relationship summary (e.g., include cross-references or hyperlinks) and deliver both with equal prominence and at the same time to each retail investor, whether or not that retail investor qualifies for those retail services or accounts.218 We disagree with commenters suggesting that dual registrants should have the option to deliver to retail investors a relationship summary describing only one type of service if, for example, that 214 See, e.g., RAND 2018, supra footnote 13 (reporting that 85% of survey respondents found the side-by-side comparison format to be helpful for purposes of deciding between a broker-dealer and investment adviser); see also CFA Letter I (stating it supported using one document to provide comparing brokerage and investment advisory services); Fidelity Letter (stating that a single Form CRS for a dual-registered firm could accomplish its objective); Schnase Letter (supporting the idea of having a unique form for dual registrants). 215 See supra footnote 208 and accompanying text; infra footnote 1046 and accompanying text (discussing studies concerning the availability and presentation of comparative information on decision making). 216 See supra footnotes 203–206 and accompanying text. 217 General Instruction 5.A. to Form CRS. 218 General Instruction 5.A. to Form CRS. E:\FR\FM\12JYR2.SGM 12JYR2 33512 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations investor does not qualify for one of the services.219 Retail investors should be able to learn about and compare the range of options a firm offers to retail investors, even if the financial professional does not believe that the retail investor meets the requirements for or is considering certain services at that time. For example, a retail investor may initially seek ongoing advice through an advisory account, but after learning about both brokerage and advisory services and speaking with a financial professional, may decide that a brokerage account is a better choice. Or a retail investor may not qualify for certain accounts at the time of receiving the relationship summary, e.g., by not being able to meet an account opening minimum, but may qualify for them in the future, or may qualify for a particular service at one firm but not another. Furthermore, a retail investor may initially make the financial professional aware of only certain asset holdings (for example, he or she approaches a firm to rollover an IRA). On that basis, the firm may believe the investor only qualifies for certain of the firm’s services. However, the investor may also have substantial other asset holdings and thus qualify for a variety of accounts that the firm offers. Knowing about the alternative brokerage and investment advisory options that a firm offers will help retail investors to compare firms’ offerings and consider whether to adjust the relationship or services as investors’ financial circumstances change. Affiliate Services. As discussed above, the proposed instructions did not permit affiliates to prepare a combined relationship summary, but did permit firms with affiliates offering retail investors brokerage or advisory services to disclose these services.220 Several commenters recommended that affiliates should have the same flexibility to prepare one or two relationship summaries as dual registrants.221 We agree that this 219 See IAA Letter I; Fidelity Letter. Item 2.D. of Form CRS. 221 See Fidelity Letter; LPL Financial Letter (‘‘[D]ual-hatted financial professionals may either (i) provide brokerage and advisory services on behalf of LPL or (ii) provide brokerage services on behalf of LPL while providing advisory services on behalf of an unaffiliated RIA that is separately registered . . . . [In the latter case, an investor] would receive a dual registrant relationship summary from LPL and a standalone investment adviser relationship summary from the RIA’’ without knowing which entity would be providing advisory services.’’). Other commenters suggested that the instructions clarify whether the requirements for dual registrants apply to affiliated broker-dealers and investment advisers. Comment Letter of State Farm Mutual Automobile Insurance Company (Aug. 6, 2018) (‘‘State Farm Letter’’) jbell on DSK3GLQ082PROD with RULES2 220 Proposed VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 flexibility is appropriate for affiliates and are modifying the instructions to permit, but not require, delivery of a single relationship summary. Affiliates preparing a single relationship summary will provide the same comparative benefits for investors as dual registrants doing so. As with dual registrants, some affiliated firms market their services together and have financial professionals who hold licenses through each firm. We recognize, however, that not all affiliates operate in the same way. Some affiliated firms operate independently, do not market their services together, and do not share financial professionals. The different ways in which financial professionals affiliate with firms to provide services also warrant this flexibility. For example, some commenters noted that many financial professionals are licensed representatives of a brokerage firm and are also licensed through an affiliated investment advisory firm or an unaffiliated investment advisory firm (sometimes as a sole proprietor) separately registered with the Commission or one or more States.222 Depending on the relationship among affiliates and their financial professionals, a single relationship summary or two separate summaries may be more appropriate.223 Many dually licensed financial professionals offer services on behalf of two affiliates, similar to dually licensed financial professionals offering services for a dual registrant. One commenter requested that the Commission provide clarity that all references to dual registrants apply to broker-dealers and investment advisers organized under a single corporate structure as affiliated entities.224 Consistent with our discussion above, we believe that retail investors seeking services from dually (‘‘[T]he SEC did not provide a template or otherwise discuss whether affiliated broker-dealers and investment advisers can use blended or combined Form CRS’’); Cambridge Letter (requesting that the Commission clarify that all references to dual registrants are applicable to broker-dealers and registered investment advisers organized under a single corporate structure as affiliated entities). 222 See, e.g., LPL Financial Letter. 223 One commenter described arrangements in which a dual-hatted financial professional may provide brokerage services on behalf of a dual registrant and advisory services on behalf of an unaffiliated investment adviser. The commenter expressed concern that an investor may be confused if the dual registrant’s and unaffiliated investment adviser’s relationship summaries both describe investment advisory services. See LPL Financial Letter. We believe the flexibility for dual registrants and affiliated firms to prepare combined or separate relationship summaries under the final instructions should address this concern, and firms can determine which presentations are most helpful for investors. 224 See Cambridge Letter. PO 00000 Frm 00196 Fmt 4701 Sfmt 4700 licensed financial professionals should receive information about all of the services the financial professional offers, even if the services are through two affiliated SEC-registered firms. As a result, if two affiliated SEC-registered firms prepare separate relationship summaries, and they provide brokerage and investment advisory services through dually licensed financial professionals, the final instructions require the firms to deliver to each retail investor both firms’ relationship summaries with equal prominence and at the same time, without regard to whether the particular retail investor qualifies for those retail services or accounts. To provide clarity, we have added a definition for dually licensed professionals in the final instructions that was not included in the proposal.225 The final instructions also provide that each of the relationship summaries must cross-reference and link to the other.226 If the affiliated firms are not providing brokerage and investment advisory services through dually licensed financial professionals, they may choose whether or not to reference each other’s relationship summary and whether or not to deliver the affiliate’s relationship summary with equal prominence and at the same time.227 Finally, we modified the instructions to explicitly permit a firm to acknowledge other financial services the firm provides in addition to its services as a broker-dealer or investment adviser registered with the SEC, such as insurance, banking, or retirement services, or investment advice pursuant to state registration or licensing.228 225 General Instruction 11.B. to Form CRS (defining ‘‘dually licensed financial professional’’ as ‘‘A natural person who is both an associated person of a broker or dealer registered under section 15 of the Exchange Act, as defined in section 3(a)(18) of the Exchange Act, and a supervised person of an investment adviser registered under section 203 of the Advisers Act, as defined in section 202(a)(25) of the Advisers Act.’’). 226 General Instruction 5.B. to Form CRS. As discussed above, as is the case for dual registrants, affiliates preparing separate relationship summaries must deliver them to each retail investor with equal prominence and at the same time, without regard to whether the particular retail investor qualifies for those retail services or accounts. Each of the relationship summaries must reference and provide a means of facilitating access to the other. General Instruction 5.B.(ii).a. to Form CRS. 227 General Instruction 5.B.(ii).b. to Form CRS. Firms that are unaffiliated will be treated as standalone broker-dealers and standalone investment advisers, each with an independent responsibility to create and deliver its own relationship summary in accordance with the final instructions. 228 General Instruction 5.C. to Form CRS. This would also permit a broker-dealer that is registered with one or more states as an investment adviser to refer to such advisory services. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations Firms may include a means of facilitating access (e.g., cross-references or hyperlinks) to additional information about those services.229 Some commenters encouraged the SEC to allow firms to disclose services of other affiliates, even if those services are not regulated by the SEC, such as investment advisory services offered by an affiliated thrift savings institution.230 In response to our request for comment asking whether we should permit firms to include wording regarding other types of services and lines of businesses, several commenters submitting mockups of relationship summaries included language referencing banking and insurance services or products.231 We found these comments persuasive and believe that permitting firms to reference financial services not necessarily regulated by the Commission so that retail investors can see the range of options available to them can benefit their decision-making, as discussed above.232 This new instruction supports and expands upon the commenters’ suggestions. Given that the focus of the relationship summary is on brokerage and/or advisory services, however, information pertaining to other services should not obscure or impede understanding of the information that must be disclosed in accordance with the Form CRS instructions.233 We believe that, together, these requirements for dually registered firms, financial professionals, and affiliates will enhance comparability while providing flexibility for them to present their services and relationships in the way the firm believes to be the clearest. B. Items The relationship summary is principally designed to provide succinct information about (i) relationships and services the firm offers to retail investors; (ii) fees and costs that retail investors will pay, conflicts of interest, 229 General Instruction 5.C. to Form CRS. Northwestern Mutual Letter (seeking flexibility to disclose advisory services offered through an affiliated thrift because this would be in the clients’ best interest); ACLI Letter (asserting that Form CRS is not flexible enough to describe in a meaningful and accurate way investment advisory services provided by insurance affiliates such as banks or thrifts). 231 See ASA Letter; Primerica Letter; Comment Letter of Stifel Financial (Aug. 7, 2018) (‘‘Stifel Letter’’) (referencing bank sweep accounts and also providing: ‘‘Banks and insurance brokers and agents may also provide access to financial planning and advice services, but these services are beyond the scope of this document.’’); Cetera Letter I (referencing bank sweep programs). 232 See supra footnotes 215, 218–219, and accompanying text. 233 See General Instruction 5.C. to Form CRS. jbell on DSK3GLQ082PROD with RULES2 230 See VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 and the applicable standard of conduct; and (iii) disciplinary history. The proposed relationship summary included this information as well as additional topics that we are eliminating, as explained further below. In determining the scope of the relationship summary, we balanced the need for robust disclosures with the risk of ‘‘information overload’’ and reader disengagement, a theme in comment letters, investor feedback at roundtables and in the Feedback Forms, and observations reported in the RAND 2018 report and other surveys and studies. Some of the key changes from the proposal include: • We have modified the sections to place substantively related information generally together. We believe this will facilitate comprehension, leading to a better-informed decision-making process and selection of a firm, financial professional, account type, services, and investments. • The final instructions simplify the introduction; highlight disciplinary history in a separate section; and integrate key questions, now characterized as ‘‘conversation starters,’’ among the remaining sections of the relationship summary. • After reviewing the comments and observations reported in the RAND 2018 report and other surveys and studies, we have determined to remove prescribed generalized comparisons between brokerage and investment advisory services. 1. Introduction The relationship summary will include a standardized introductory paragraph. The instructions will require a firm to: (i) State the name of the broker-dealer or investment adviser and whether the firm is registered with the Securities and Exchange Commission as a broker-dealer, investment adviser, or both; (ii) indicate that brokerage and investment advisory services and fees differ and that it is important for the retail investor to understand the differences; and (iii) state that free and simple tools are available to research firms and financial professionals at the Commission’s investor education website, Investor.gov/CRS, which also provides educational materials about broker-dealers, investment advisers, and investing.234 The introduction’s instructions as adopted differ from the proposal, which Item 1 of Form CRS. Firms also must include the date prominently at the beginning of the relationship summary, for example, in the header or footer of the first page or in a similar location for a relationship summary provided electronically. See id. PO 00000 234 See Frm 00197 Fmt 4701 Sfmt 4700 33513 would have required prescribed wording in the introduction that differed for broker-dealers, investment advisers, and dual registrants. Specifically, the prescribed wording in the proposed introduction was intended to highlight in a generalized sense and make investors aware that brokerdealers and investment advisers are different, and that investors needed to carefully consider this choice. We received one comment specifically addressing the introduction. It stated that the prescribed wording would not capture the attention of retail investors and failed to adequately convey information regarding differences between investment advisers and broker-dealers.235 In addition, several of the mock-ups commenters submitted included other suggestions for beginning the relationship summary, many of which had an introduction that was generally shorter and included less discussion about generalized business models than the proposed relationship summary.236 In response to the comment and the mock-ups, a number of which we found conveyed useful information in a more concise manner than the proposed prescribed wording, we simplified and standardized the introductory paragraph, eliminating or replacing most of the prescribed wording we proposed, as discussed further below. In addition, we added a requirement to provide a link to Investor.gov/CRS in the Introduction to highlight the tools and educational resources available to retail investors. This dedicated page on Investor.gov will provide information specifically tailored to educate retail investors about financial professionals, including search tools in order to research firms and financial professionals and information about broker-dealers and investment advisers and their different services, fees, and conflicts. We believe the changes and the new page will better focus retail investors on how the relationship summary can be most helpful to them, while providing a link to resources to more general investor education information at the front of the relationship summary. We made the following specific changes to the introduction: First, the final instructions require all firms to include certain information without prescribing the specific words that firms 235 See CFA Letter I. The commenter argued that the introduction would best be used to convey additional basic information about the differences between services offered by broker-dealers, investment advisers, and dual registrants. See id. 236 See, e.g., Primerica Letter; Schwab Letter I; SIFMA Letter. E:\FR\FM\12JYR2.SGM 12JYR2 33514 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations must use.237 The proposed relationship summary would have required prescribed wording that differed for standalone investment advisers, standalone broker-dealers, and dual registrants.238 These changes correspond with the general approach throughout the final instructions of permitting more flexibility for firms to tailor the wording of their relationship summaries to enhance the relationship summary’s accuracy, clarity, usability, and design.239 Second, we eliminated the proposed requirement that standalone investment advisers state that they do not provide brokerage services, and vice versa.240 We believe this information is more succinctly conveyed by including the firm’s registration status.241 Additionally, commenters pointed out that the choice of financial services providers is not binary—there are more than two types of services offered that could apply.242 We agree that the proposed wording could be viewed as unduly constricting and potentially misleading. Third, we excluded the statement for dual registrants that, depending on an investor’s needs and investment objectives, the firm can provide services in a brokerage account, investment advisory account, or both at the same time. We believe that this information is conveyed more effectively by the statement of a firm’s registration status and the information provided elsewhere in the relationship summary, such as in the description of services that the firm provides.243 In addition, requiring a statement of a firm’s registration status at the beginning of the relationship 237 See Item 1 of Form CRS. Proposed Items 1.B. (standalone brokerdealers); 1.C. (standalone investment advisers); and 1.D. (dual registrants) of Form CRS. 239 See supra footnote 83 and accompanying text. 240 In bold font, a standalone broker-dealer would have been required to state: ‘‘We are a broker-dealer and provide brokerage accounts and services rather than advisory accounts and services.’’ Proposed Item 1.B. of Form CRS. Likewise, a standalone investment adviser would have been required to state in bold font: ‘‘We are an investment adviser and provide advisory accounts and services rather than brokerage accounts and services.’’ Proposed Item 1.C. of Form CRS. Dual registrants would have included a similar statement in bold font: ‘‘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.’’ Proposed Item 1.D. of Form CRS. 241 As noted and discussed further infra, the Introduction will also refer retail investors to Investor.gov/CRS for further information regarding broker-dealers and investment advisers. 242 See, e.g., ACLI Letter (describing the ‘‘binary approach that the SEC has taken, which is not entirely accurate for the distribution of variable annuity and variable life products’’). 243 See infra Section II.B.2. jbell on DSK3GLQ082PROD with RULES2 238 See VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 summary helps obviate a need for the Affirmative Disclosures under the Exchange Act and the Advisers Act proposed specifically to require a broker-dealer and an investment adviser to prominently disclose that it is registered as a broker-dealer or investment adviser, as applicable, with the Commission in print or electronic retail investor communications.244 As discussed below, we are not adopting the Affirmative Disclosures.245 In response to our request for comment relating to the Affirmative Disclosures,246 several commenters stated that the proposed rules were duplicative of other disclosure obligations (e.g., Form ADV, Regulation Best Interest, Form CRS) 247 and that such rules were costly and difficult to implement and supervise.248 Fourth, we have included an instruction that allows (but does not require) reference to FINRA or Securities Investor Protection Corporation (‘‘SIPC’’) membership in a manner consistent with other rules and regulations (e.g., FINRA rule 2210).249 We are not adopting the proposed requirements to include statements that: (i) There are different ways an investor can get help with investments; (ii) an investor should carefully consider which types of accounts and services are right for him or her; (iii) the relationship summary gives an investor a summary of the types of services the firm provides and how the investor pays; and (iv) an investor should ask for more information with a specific reference to the key questions.250 We believe that this information is not necessary in the introduction and is better conveyed through the revised question-and-answer structure of the relationship summary and a more streamlined introduction highlighting that it is important for retail investors to understand the difference between brokerage and investment advisory services and fees and referencing Investor.gov/CRS.251 The conversation 244 See Proposing Release, supra footnote 5, at Section III.D. 245 See infra Section III. 246 See Proposing Release, supra footnote 5, at Section III.D. 247 See, e.g., LPL Financial Letter; SIFMA Letter; IRI Letter; Committee of Annuity Insurers Letter; Trailhead Consulting Letter; see also infra Section III. 248 See, e.g., LPL Financial Letter; Bank of America Letter; IRI Letter; SIFMA Letter; Comment Letter of Altruist Financial Advisors LLC (Aug. 7, 2018) (‘‘Altruist Letter’’); see also infra Section III. 249 See Item 1.A. of Form CRS. 250 See Proposed Items 1.B. (standalone brokerdealers); 1.C. (standalone investment advisers); and 1.D. (dual registrants) of Form CRS. 251 Similarly, we eliminated the reference to suggested questions on a specified page because the PO 00000 Frm 00198 Fmt 4701 Sfmt 4700 starters more directly prompt discussion between retail investors and their investment professionals than a generalized statement to ask for more information, and the conversation starters relating to the Relationships and Services item convey that an investor should carefully consider which types of accounts and services are appropriate. In addition, several commenter mock-ups demonstrated that removing the prescribed wording from each of these changes results in a shorter introduction and promotes additional white space in the relationship summary. Our adopted instructions remove required text that might be unnecessary for investors, similar to introductions in mock-ups that were typically shorter with less discussion about generalized business models than the proposed relationship summary.252 As a result, we believe these changes will enhance the relationship summary’s clarity, usability, and design. Finally, we added a requirement to provide a link to Investor.gov/ CRS and state that free and simple search tools are available at Investor.gov/CRS in order to research firms and financial professionals. Firms also will state that the page provides educational materials about broker-dealers, investment advisers, and investing. These materials include information about the different services and fees that broker-dealers and investment advisers offer. We believe a focus on Investor.gov and specifically the Investor.gov/CRS page at the beginning of the relationship summary will be more helpful to retail investors than the proposed relationship summary introduction. Investor.gov provides various resources that can assist with investor education relating to firms and their professionals. Among other components, Investor.gov currently provides resources prepared by Commission staff for retail investors to: • Review the background of their investment professional; • Educate themselves about investment products, including the risks and unique characteristics of many products; • Perform fee calculations; • Review Investor Alerts and Bulletins; • Find contact information for the Commission; and key questions are now included throughout the relationship summary. 252 See, e.g., Primerica Letter; Schwab Letter I; SIFMA Letter. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 • Review educational information regarding broker-dealers and investment advisers.253 The Investor.gov/CRS page will bring together these types of educational materials about investment professionals, along with broader tools and other content specifically tailored for retail investors on Investor.gov, which will help them to more easily learn about different types of firms and find information about specific firms and financial professionals. As discussed further below, we are removing discussions in the proposed relationship summary that were more generalized or educational in nature, including the comparison sections for standalone broker-dealers and investment advisers and other statements comparing these two different types of financial services and fees. Many commenters indicated that the Commission is generally betterpositioned to provide investor education materials as compared to firms.254 As a result, the revised introduction provides the Investor.gov/ CRS link at the beginning of the relationship summary to direct retail investors to the Commission staff’s resources and highlights the importance of investor education.255 Investors and commenters also supported highlighting Investor.gov more generally. Investor feedback at roundtables generally indicated that Investor.gov was a useful website for retail investors and should be prominent in the relationship summary.256 Comment letters were 253 See Investor Bulletin: Ten Ways to Use Investor.gov (Mar. 8, 2017), available at https:// www.investor.gov/additional-resources/news-alerts/ alerts-bulletins/investor-bulletin-ten-ways-useinvestorgov; see also Brokers, available at https:// www.investor.gov/research-before-you-invest/ methods-investing/working-investmentprofessional/brokers; Investment Advisers, available at https://www.investor.gov/researchbefore-you-invest/methods-investing/workinginvestment-professional/investment-advisers. 254 See supra footnote 40 and accompanying text. 255 Certain commenters provided mock-ups that did not include any introductory wording. E.g., Fidelity Letter; IAA Letter I. In our view, these mock-ups either did not include, or, at minimum, did not appropriately highlight, important information regarding the registration status of the firm or the availability of additional information for retail investors. 256 See Denver Roundtable (Investor Nine: ‘‘Yeah, I went there [to Investor.gov], that’s good.’’ Ms. Siethoff: ‘‘Did you think that sort of thing should be highlighted more?’’ Investor Nine: ‘‘More, yes. More’’); Philadelphia Roundtable (Investor Four: ‘‘I went to those websites [including Investor.gov] and I found them very useful.’’). Some Feedback Form commenters also indicated that a link to Investor.gov or a similar educational website would be helpful. See, e.g., Baker Feedback Form (‘‘I found the document overall extremely useful and learned, most importantly, to refer to the sec.gov website often’’); Shepard Feedback Form (‘‘An investing.gov VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 supportive of the Commission providing educational materials to retail investors generally and Investor.gov specifically.257 Observations in surveys and studies also indicated that many retail investors would seek information at Investor.gov and would trust that information because it is a government site.258 Some investor studies, however, indicated that retail investors did not understand what information was available at Investor.gov.259 Moving the link to Investor.gov/CRS and the related explanation to the front of the relationship summary (from the ‘‘Additional Information’’ section at the end of the relationship summary, as proposed) will address this issue by making the website more prominent and by concentrating information helpful to retail investors on one dedicated page on Investor.gov. 2. Relationships and Services As proposed, after the introduction firms will be required to summarize the relationships and services that they offer to retail investors. They will use a revised heading, ‘‘What investment services and advice can you provide me? ’’, which follows the new questionand-answer format.260 Several commenters used this question or a similar heading in mock-ups they provided.261 Generally as proposed, we [sic] website seems to be a useful source’’); Smith2 Feedback Form (‘‘would like to see a link included to a site or sites that contain general investment information’’). 257 See, e.g., MassMutual Letter (‘‘The SEC provides a wealth of information at www.investor.gov for educational purposes . . . Providing general information about broker-dealers and investment advisers in a consistent and readilyaccessible [sic] space on the SEC’s website would allow each firm to use the space available in Form CRS to accurately describe its brokerage and advisory services, with tailored language to reflect its business model, products and services offered and conflicts of interest.’’). 258 See Kleimann II, supra footnote 19 (‘‘Many participants said that they would use the investor.gov site . . . [and] that they would put a high level of trust in whatever information would be on the site because it was a government site.’’); RAND 2018, supra footnote 13 (finding that twothirds of investors would be ‘‘very likely’’ or ‘‘somewhat likely’’ to click on a hyperlink for investor education materials). 259 See Kleimann I, supra footnote 19 (‘‘None [of the study participants] had a clear idea of the information that would be provided at Investor.gov.’’); see also Kleimann II, supra footnote 19 (‘‘Many participants said that they would use the investor.gov site to research the firm, but few knew what specific information would be at that site . . .’’). 260 Item 2.A. of Form CRS. 261 See, e.g., IAA Letter I; LPL Financial Letter; Primerica Letter ; SIFMA Letter; Wells Fargo Letter; Fidelity Letter; Schwab Letter I (mock-up). We proposed requiring the heading, ‘‘[Types of] Relationships and Services.’’ As discussed above, many commenters recommended that the relationship summary use a question-and-answer PO 00000 Frm 00199 Fmt 4701 Sfmt 4700 33515 are requiring firms to provide information about specific aspects of their brokerage and investment advisory services, with modifications from the proposal to permit firms to use their own wording to cover these topics. We proposed separate instructions for firms to describe brokerage account services and investment advisory account services. Firms would have used a mix of prescribed wording and their own wording to provide a summary overview of fees and certain required topics, including the scope of advice services, investment discretion, monitoring, and significant limitations on investments available to retail investors.262 We received feedback from the observations in the RAND 2018 report, other surveys and studies and on Feedback Forms that relationships and services is an important area to cover,263 and that investors learned important information from the prescribed wording on relationships and services.264 In addition, the IAC recommended that the Commission adopt a uniform, plain English disclosure for retail investors that would include basic information ‘‘about the nature of services offered,’’ among other format as a more engaging approach for retail investors. 262 See, e.g., Proposed Item 2.B. of Form CRS (‘‘If you are a broker-dealer that offers brokerage accounts to retail investors, summarize the principal brokerage services that you provide to retail investors.’’); and Proposed Item 2.C. of Form CRS (‘‘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.’’). 263 See RAND 2018, supra footnote 13 (next to fees and costs, survey participants responded the relationships and services section was one of the most informative; more than 56% of survey participants said to keep the section the same length); see also Cetera Letter II (Woelfel) supra footnote 17 (85% of survey participants responded that this section was very or somewhat important); Schwab Letter I (Koski) supra footnote 21 (54% of survey participants selected ‘‘a description of the investment advice services the firm will provide to me’’ from a menu of 11 subjects as one of the four most important things for firms to communicate). In addition, nearly 90% of Feedback Form commenters graded this section as ‘‘very useful’’ or ‘‘useful.’’ See Feedback Forms Comment Summary supra footnote 11 (summary of responses to Question 2(a)). 264 See RAND 2018, supra footnote 13 (in qualitative interviews, participants appeared to have ‘‘a general understanding that this section describes two different services or accounts that a client would choose’’); Kleimann I, supra footnote 19 (while study authors found that participants had difficulty with ‘‘sorting out the similarities and differences,’’ this study also reports that ‘‘[n]early all participants easily identified a key difference between the Brokerage Accounts and Advisory Accounts as the fee structure either being tied to transactions or to assets. Some further identified as a key difference who had the final approval on all transactions, seeing the Brokerage Account as giving them more control on making the final decision.’’). E:\FR\FM\12JYR2.SGM 12JYR2 33516 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 things.265 However, some commenters expressed concern that, without more educational content, this approach would not sufficiently inform or would confuse retail investors.266 One commenter pointed out that the proposed instructions dictated different ways for broker-dealers and investment advisers to describe similar services.267 These commenters suggested including more explanatory wording or definitions to cover what services are typically associated with brokerage accounts and investment advisory accounts, to provide more background information to help retail investors understand the firm-specific disclosures.268 At the same time, commenters noted that summary, prescribed wording for this section may not accurately describe the services of every broker-dealer or investment adviser.269 Results of the RAND 2018 265 See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10; and IAC Form CRS Recommendation, supra footnote 10. 266 See CFA Letter I (‘‘We believe the Commission should . . . require firms to be crystal clear about the nature of the services they offer. Simply telling [investors] that the account is a brokerage account or an advisory account doesn’t necessarily convey useful information.’’); CFA Institute Letter I (‘‘Given the similarities to what investment advisers offer, CRS disclosure of these additional services will likely confuse investors without language clarifying that they are outside of their usual broker-dealer duties and would typically require a separate contract.’’). 267 CFA Letter I. 268 See CFA Letter I (suggesting prescribed wording for how typical broker-dealers and investment advisers might describe their services); CFA Institute Letter I (suggesting alternative wording for how broker-dealers might describe their services). Commenters on Feedback Forms also asked for explanatory wording and definitions. See Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 4) (seven commenters asked for definitions of terms such as transaction-based fee, asset-based fee or wrap fee; 10 asked for a definition or better explanation of the term ‘‘fiduciary’’); see also, Bhupalam Feedback Form (‘‘The definition of a broker dealer [sic] and investment advisory [sic] is not very clear.’’); Daunheimer Feedback Form (‘‘For a novice investor, all terms that seasoned investors take for granted, are new to them. Consider making the language as simple as possible.’’); Margolis Feedback Form (‘‘wording is very confusing and not very accurate’’); Anonymous27 Feedback Form (‘‘define better’’), but see Baker Feedback Form (‘‘the discussion of differences among the relationships is very useful as it describe [sic] the differences in services provided . . . and most importantly, the difference between a commissionbased fee and an ‘asset-value’ fee’’); Hawkins Feedback Form (‘‘Summary does a good job of explaining the basis [sic] services for a brokerage vs advisory account. Some clearer examples could help.’’); Rohr Feedback Form (‘‘Makes clear how a discretionary account differs from a brokerage account’’). 269 See, e.g., MassMutual Letter (explaining that the prescribed wording that a customer will pay a commission each time a security is bought and sold is not universally true, e.g., for mutual funds and variable annuities with internal exchange programs, which allow a customer to switch from one investment to another without paying a VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 survey reflected these concerns and showed that almost a quarter of survey respondents (22.2%) described the relationships and services section as ‘‘difficult’’ or ‘‘very difficult’’ to understand.270 Comments from participants in qualitative interviews reported in the RAND 2018 report, as well as comments from roundtable participants and on Feedback Forms, indicated that prescribed terms such as ‘‘transaction-based fee,’’ ‘‘asset-based fee,’’ ‘‘discretionary account,’’ and ‘‘non-discretionary account’’ contributed to this difficulty.271 As discussed in Section II.A.1. above, we are sensitive to the potential inaccuracies and confusion that the prescribed wording can create. We also recognize that in some cases, providing instructions that require broker-dealers and investment advisers to describe similar services in different ways can create confusion. Accordingly, we have revised the instructions to allow firms to use more of their own wording. We also eliminated the separate instructions for brokerage account services and investment advisory account services, and instead are adopting one set of instructions that generally applies the same requirements to all firms.272 To commission); CFA Letter I (recognizing that a generalized description of portfolio management services, included for purposes of educating investors, does not apply to all business model among registered investment advisers). 270 RAND 2018, supra footnote 13. In the RAND 2018 qualitative interviews, participants noted several phrases that raised concerns such as ‘‘additional services’’ and ‘‘might pay more’’ and identified terms that needed further definition. Id. Another interview-based investor study found that ‘‘[p]articipants were quite mixed in their understanding about the advice and monitoring that was offered in the two accounts’’ when presented with the proposed sample dual registrant relationship summary. Kleimann I, supra footnote 19. 271 RAND 2018, supra footnote 13; see also Betterment Letter I (Hotspex) supra footnote 18 (finding that ‘‘respondents found certain terminology (e.g., ‘fiduciary,’ ‘asset-based,’ ‘ETF’) to be unclear or lack sufficient detail’’). Roundtable discussions found similar results. See, e.g., Philadelphia Roundtable (participant finding ‘‘transaction-based fee’’ to be complex); Miami Roundtable (participant stating that ‘‘most people don’t really understand’’ what fiduciary duty means); see also Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 4) (Seven Feedback Forms included narrative comments that asked for definitions of terms such as ‘‘transaction-based fee,’’ ‘‘asset-based fee’’ or ‘‘wrap fee;’’ 10 asked for explanation or definition of the term ‘‘fiduciary’’); Anonymous06 Feedback Form (‘‘Definitions might not be understood transaction based vs asset based fee’’); Baker Feedback Form (‘‘It may be more helpful to have detailed definitions (Ex. ‘‘transaction-based fee’’) that, unfortunately, result in a longer document.’’); Bhupalam Feedback Form (‘‘definition of a broker dealer [sic] and investment advisory [sic] is not very clear’’); Starmer2 Feedback Form (‘‘Spell out . . . best interest’’). 272 See, e.g., Item 2.B. of Form CRS (requiring all firms to summarize their principal services but PO 00000 Frm 00200 Fmt 4701 Sfmt 4700 facilitate comparison of firms’ relationships and services, however, we have retained the concept of specific sub-topics that each firm must cover in this section.273 Another change from the proposed instructions relates to a concern regarding how accounts were delineated. The proposed instructions would have applied based on whether or not broker-dealers and investment advisers offered brokerage accounts or investment advisory accounts to retail investors and would have included some prescribed language referencing accounts.274 Insurance and variable annuity providers commented that this focus on accounts would not allow them to accurately describe insurance offerings and would be confusing, particularly to investors whose insurance or annuity products are held directly with an issuing insurance company.275 We agree and have replaced references to accounts in this section with references to ‘‘services, accounts, or investments you make available to retail investors.’’ 276 a. Description of Services The final instructions have an overarching requirement to state that the firm offers brokerage services, investment advisory services, or both, to retail investors, and to summarize the principal services, accounts, or investments the firm makes available to retail investors.277 A firm also must include any material limitations on those services.278 The final instructions require firms to include certain requiring broker-dealers to state whether or not they offer recommendations and investment advisers to state the particular types of advisory services they offer). 273 As discussed in Section II.A.2 above, we are not requiring that these sub-topics follow a prescribed order, so firms are able to tailor the presentation of their services, as well as include additional information about their brokerage or advisory services, so long as the description covers all applicable topics. See supra footnote 121 and accompanying text. 274 See, e.g., Proposed Items 2.B.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 . . . .’’) and 2.C.4. (‘‘If you significantly limit the types of investments available to retail investors in any accounts, include the following . . . .’’) of Form CRS. In addition, some of the prescribed wording included language specific to accounts. See, e.g., Proposed Item 2.B.1. of Form CRS. Brokerdealers would state, ‘‘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.’’ 275 E.g., ACLI Letter; Committee of Annuity Insurers Letter; IRI Letter; MassMutual Letter; New York Life Letter; Northwestern Mutual Letter. 276 Item 2.B. of Form CRS. 277 Item 2.B. of Form CRS. 278 Item 2.B. of Form CRS. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations information in their descriptions. Similar to the proposal, broker-dealers must state the particular types of principal brokerage services the firm offers to retail investors, including buying and selling securities, and whether or not they offer recommendations to retail investors (i.e., to distinguish execution-only services).279 Investment advisers must state the particular types of principal advisory services they offer to retail investors, including, for example, financial planning and wrap fee programs.280 The final instructions do not, however, require prescribed wording to describe the particular characteristics of these services, as did the proposed instructions.281 Commenters argued that the proposed prescribed wording may not accurately describe the services of every brokerdealer or investment adviser.282 As discussed in Section II.A.1 above, given that investors may be confused by information that does not directly relate to the firm’s offerings, we are allowing firms to use their own wording to describe their own services. Therefore, unlike the proposal, the final instructions do not prescribe specific wording for firms to describe the particular characteristics of these services.283 Some commenters raised concerns about investor confusion if both brokerdealers and investment advisers discuss the advice they provide in the relationship summary. To mitigate that confusion, some commenters called for an explicit statement that broker-dealers are in sales relationships.284 In response 279 Item 2.B. of Form CRS. 2.B. of Form CRS. 281 See, e.g., Proposed Item 2.B.2. of Form CRS (requiring broker-dealers (i) that only offer accounts in which they offer recommendations to retail investors to state that the retail investor may select investments or the broker-dealer 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’’ and (ii) that do not offer recommendations to state that the retail investor ‘‘will select the investments’’ and ‘‘will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments’’). 282 See, e.g., MassMutual Letter (explaining that the prescribed wording that a customer will pay a commission each time a security is bought and sold is not universally true, e.g., for mutual funds and variable annuities with internal exchange programs, which allow a customer to switch from one investment to another without paying a commission); CFA Letter I (recognizing that a generalized description of portfolio management services, included for purposes of educating investors, does not apply to all business models among registered investment advisers). 283 See generally Items 2.B.(i) through 2.B.(v) of Form CRS. 284 See, e.g., CFA Institute Letter I; Consumers Union Letter; see also Kleimann II, supra footnote jbell on DSK3GLQ082PROD with RULES2 280 Item VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 to these concerns, we added the explicit requirement that broker-dealers state that they buy and sell securities, in order to clarify their principal services.285 We also have included a note in the final instructions that broker-dealers offering recommendations should consider the applicability of the Investment Advisers Act of 1940, consistent with SEC guidance.286 The final instructions require all firms to address the following topics in the description of their services: (i) Monitoring; (ii) investment authority; (iii) limited investment offerings; and (iv) account minimums and other requirements.287 As discussed further below, the final instructions require firms to include much of the same substantive information as proposed, but rely less on prescribed wording and assumptions regarding typical brokerage and investment advisory accounts.288 In response to comments, we added a new requirement for firms to disclose whether or not they have account minimums.289 Commenters recommended that we include information about account minimums in the relationship summary.290 In addition, a number of commenters submitting mock-ups included disclosures on account minimums in their forms.291 We agree this information is important to investors when they are deciding on account types and services, particularly as they consider the amount of funds they are planning to invest and whether they 19 (alternative wording for redesigned relationship summary described broker-dealer services as a ‘‘sales relationship’’). 285 See Item 2.B of Form CRS (‘‘For brokerdealers, state the particular types of principal brokerage services you offer, including buying and selling securities, and whether or not you offer recommendations to retail investors.’’). 286 See Item 2.B.(ii) to Form CRS. See Solely Incidental Release, supra footnote 47. 287 Item 2.C. of Form CRS. 288 In the proposed instructions, assistance with developing or executing the retail investor’s strategy and monitoring the performance of the retail investor’s account were characterized as additional services for broker-dealers. The final instructions do not make this distinction and instead permit firms more flexibility to describe their services accurately. See Proposed Item 2.B.3. of Form CRS. 289 Item 2.B.(iv) to Form CRS (‘‘Explain whether or not you have any requirements for retail investors to open or maintain an account or establish a relationship, such as minimum account size or investment amount.’’). 290 See, e.g., NASAA Letter (‘‘Form CRS should specify minimum account size and include information on miscellaneous fees different categories of investors can expect to pay.’’); Cetera Letter I (Form CRS should include ‘‘[w]hether or not the firm has established standards for the minimum or maximum dollar amount of various account types.’’). 291 See, e.g., Primerica Letter and Cetera Letter I. PO 00000 Frm 00201 Fmt 4701 Sfmt 4700 33517 may incur any fees or become ineligible for certain services if their accounts fall under certain dollar thresholds. We also removed requirements to discuss fees at the beginning of this section 292 and are consolidating these requirements with other related ones in the fees, costs, conflicts, and standard of conduct section, as discussed below.293 We also are not adopting a proposed requirement to describe any regular communications with retail investors.294 Neither the RAND 2018 report nor other surveys and studies suggested that this information was important to investors, as compared to fees. Mock-ups submitted by commenters also did not include this disclosure, underscoring the relative importance of other topics. Given the goal of limiting the length of the relationship summary so that investors remain engaged and are not overwhelmed by the information, we decided to prioritize requiring other information in the relationship summary. Monitoring. The final instructions require both broker-dealers and investment advisers to explain whether or not they monitor retail investors’ investments, including the frequency and any material limitations of that monitoring, and if so, whether or not the monitoring services are part of the firm’s standard services.295 In the proposal, different instructions concerning monitoring applied to broker-dealers and investment advisers. Broker-dealers would have stated whether they monitored the performance of retail investors’ accounts, and if so, how frequently they performed such monitoring, whether it constituted additional services or was part of the broker-dealer’s standard services, and whether a retail investor would pay more for it.296 Investment advisers 292 See Proposed Items 2.B.1. (broker-dealers) (‘‘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.’’); and 2.C.1. (investment advisers) (‘‘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 ongoing 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.’’) of Form CRS. 293 See infra footnotes 373–375 and accompanying text. 294 See Proposed Items 2.B.3. (broker-dealers) and 2.C.2. (investment advisers) of Form CRS (‘‘Briefly describe any regular communications you have with retail investors, including the frequency and method of the communications.’’). 295 Item 2.B.(i) of Form CRS. 296 Proposed Item 2.B.3. of Form CRS. E:\FR\FM\12JYR2.SGM 12JYR2 33518 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations would have stated how frequently they monitor retail investors’ accounts.297 One commenter objected to the requirement for broker-dealers to describe additional services, including monitoring, on the basis that the information would add little value.298 On the other hand, several commenters suggested that understanding the degree to which firms monitor the performance of their investments can be important to investors.299 One of these commenters noted that broker-dealers and investment advisers have different legal obligations to monitor accounts, and that differences would remain even under Regulation Best Interest.300 Observations from surveys and studies indicated that investors are interested in or may benefit from clarification of monitoring services.301 For example, an overwhelming majority of participants in the OIAD/RAND study believed that a financial professional required to act in an investor’s best interest would monitor the investor’s account on an ongoing basis.302 In qualitative interviews in the RAND 2018 report, participants seemed to distinguish brokerage and investment advisory accounts and assess which type of relationship was a better fit for different investors based on assumptions concerning monitoring.303 297 Proposed Item 2.C.2. of Form CRS. Wells Fargo Letter (recommending elimination of broker-dealer description of additional services because it could take up substantial space and adds little value for the investor). 299 See, e.g., Comment Letter of the St. John’s Law School Securities Arbitration Clinic (Aug. 7, 2018) (‘‘St. John’s Law Letter’’); CFA Letter I (discussing investors’ expectations of a fiduciary duty based on whether and to what degree a firm or financial professional provides monitoring services); Comment Letter of the Commonwealth of Massachusetts (Aug. 7, 2018) (‘‘Massachusetts Letter’’) (suggesting that the payment of ongoing compensation, such as a trail commission, indicates an ongoing relationship and should carry ongoing duties to monitor the investment); IAA Letter I (stating that, just as an adviser’s duty to monitor extends to all personalized advice it provides a client, so should investors expect a similar duty from broker-dealers when providing monitoring services). 300 See CFA Letter II. 301 See, e.g., RAND 2018, supra footnote 13 (in qualitative interviews, ‘‘participants were sometimes unclear on how a financial professional would monitor an account’’ and ‘‘some participants were unclear on how frequently monitoring would occur’’). 302 See OIAD/RAND (finding that 69% of all participants in the survey, 75% of a specialized group defined as ‘‘investors,’’ and 86% of a specialized group defined as ‘‘investment advice consumers’’ believed that best interest required ongoing monitoring). 303 See RAND 2018, supra footnote 13 (in qualitative interviews, ‘‘some felt that brokerage accounts are better for those with investment expertise and time to dedicate to investing, whereas advisory accounts are better for those who have less expertise and/or less time to monitor investments’’; jbell on DSK3GLQ082PROD with RULES2 298 See VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 Other surveys and studies also showed that participants varied in their understanding of monitoring and whether they should expect firms to monitor their account.304 We disagree with the comment that requiring broker-dealers to describe monitoring services would add little value. As we also state in the Regulation Best Interest Release, we believe that it is important for retail customers to understand (1) the types of monitoring services (if any) a particular brokerdealer provides, and (2) whether the broker-dealer will be monitoring the particular retail customer’s account.305 We also agree with commenters that monitoring is an important distinguishing feature of different investment services and believe that retail investors should have accurate expectations of the types of monitoring firms offer. We are therefore requiring firms to explain whether or not they monitor retail investors’ investments, and if so, the frequency, material limitations, and whether or not monitoring is offered as part of the firm’s standard services.306 The proposal provided different instructions for broker-dealers and investment advisers concerning monitoring, requiring broker-dealers to discuss monitoring of account performance only if they offered it, and requiring investment advisers to disclose how frequently they monitor retail investors’ accounts, as monitoring is generally part of ongoing advisory services.307 Even with the different wording for broker-dealers and investment advisers as proposed, some participants in investor studies still assumed that the level of monitoring was the same between broker-dealers and investment advisers.308 As one participant was confused by a statement that the firm could provide ‘‘additional services to assist you and monitor performance’’ and wanted to know up front which services would be included and which would cost extra.). 304 See Kleimann I, supra footnote 19 (‘‘Participants assumed that the level of advice and monitoring provided in the two accounts would be the same. They defined monitoring as constant looking at the market and their accounts and making sure their accounts were making money’’); Betterment Letter I (Hotspex) supra footnote 18 (among survey participants reviewing a standalone adviser relationship summary designed to follow the proposal sample, only 37% correctly identified as ‘‘false’’ a statement that broker-dealers typically monitor client’s portfolios and provide advice on an ongoing basis). 305 See Regulation Best Interest Release, supra footnote 47; see also Solely Incidental Release, supra footnote 47. 306 Item 2.B.(i) of Form CRS. 307 See Fiduciary Release, supra footnote 47. 308 See Kleimann I, supra footnote 19, at 10 (‘‘Some participants assumed that the advice and level of monitoring was the same.’’); Betterment PO 00000 Frm 00202 Fmt 4701 Sfmt 4700 discussed above, we believe it is important for firms to describe more accurately and precisely the monitoring that they actually do for retail investors. Therefore, we are retaining, with slight modifications, the obligation to disclose monitoring services, applying the same instruction to both broker-dealers and investment advisers, and eliminating the prescribed wording. The final instructions pertain to monitoring services generally and are not limited to monitoring for account performance only; to the extent firms describe monitoring services, they must include the frequency and any material limitations on these services and whether or not they are offered as part of the firm’s standard services. We believe that subjecting firms to the same requirements to describe their own monitoring services, including a specific statement that they do not provide monitoring, if that is the case, will better facilitate investor understanding of whether any monitoring is provided and if so, the scope and type of such service. This approach also may result in more comparable information so that retail investors can understand the key differences among monitoring services by different firms based on firm-specific descriptions. Investment Authority. The final instructions require investment adviser firms that accept discretionary authority to describe those services and any material limitations on that authority. Broker-dealers may, but are not required, to state whether they accept limited discretionary authority. Both investment advisers that offer nondiscretionary services and brokerdealers must explain that the retail investor makes the ultimate decision regarding the purchase or sale of investments.309 Commenters and results from the RAND 2018 qualitative interviews suggested modifications to the proposed investment authority disclosures in the relationship summary but generally supported including this topic.310 In Letter I (Hotspex) supra footnote 18 (among survey participants reviewing a standalone investment adviser’s relationship summary designed to follow the proposal, only 37% correctly identified as ‘‘false’’ a statement that broker-dealers typically monitor client’s portfolios and provide advice on an ongoing basis). 309 Item 2.B.(ii) of Form CRS. 310 See CFA Letter I (stating that it is necessary for firms to describe the various types of discretionary and/or non-discretionary accounts they offer with specificity for such information to be useful to investors in choosing among providers for financial services); CFA Institute (suggesting that investment advisers only be required to discuss the type of accounts they offer (i.e., discretionary and/or nondiscretionary accounts) because discussing both—when not both are offered—would E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 addition, various commenters submitting their own mock-ups included disclosures on investment authority in their relationship summaries.311 One commenter also alluded to disputes that can arise when investors misunderstand the investment authority the financial professional exercises for different accounts.312 One investor study indicated that only a few investors understood from the proposed sample dual-registrant relationship summary that non-discretionary advisory accounts offer investors the ability to approve recommendations.313 Some RAND 2018 interview participants indicated that further definitions of ‘‘discretionary account’’ and ‘‘non-discretionary account’’ would be helpful.314 We continue to believe that it is important for investors to understand whether they or the firm or financial professional ultimately makes the investment decision in the relationship or service that they are considering. Accordingly, the final instructions generally require disclosure of the same substantive information on this topic as the proposed instructions, but in a less prescriptive way. As discussed in Section II.A.1, above, we believe that allowing firms to use their own wording be confusing to customers); Betterment Letter I (stating that some of the prescribed language concerning investment authority may lead to more confusion than it clarifies); RAND 2018 report, supra note 13 (participants in qualitative interviews stated that it would be helpful if the relationship summary provided clearer definitions of ‘‘discretionary account’’ and ‘‘non-discretionary account’’); see also Kleimann I, supra note 19 (noting that some ‘‘identified a key difference as who had final approval on all transactions, seeing the Brokerage Account as giving them more control’’ and only a few ‘‘recognized that nondiscretionary advisory accounts also offer this option.’’). One Feedback Form commenter also noted that explanation of non-discretionary accounts was not clear. See Shaffer Feedback Form (broker-dealer recommendation and investment adviser ‘‘non-discretionary’’ account seem very similar. I was asking: ‘‘what’s the difference.’’), but see Asen Feedback Form (‘‘The Relationship and Services section for BDs is clear in that the investment decision is the customer’s . . .’’); Rohr Feedback Form (‘‘makes clear how a discretionary account differs from a brokerage account’’). 311 See, e.g., Stifel Letter; AALU Letter; Wells Fargo Letter; Cetera Letter I; LPL Financial Letter; IAA Letter I; Primerica Letter; ASA Letter. 312 See St. John’s Law Letter (describing an arbitration case in which investor was not informed of a change in investment authority when the account type changed). 313 See Kleimann I, supra footnote 19 (noting that some ‘‘identified a key difference as who had final approval on all transactions, seeing the Brokerage Account as giving them more control’’ and only a few ‘‘recognized that non-discretionary advisory accounts also offer this option.’’). 314 See RAND 2018, supra footnote 13 (participants in qualitative interviews stated that it would be helpful if the relationship summary provided clearer definitions of ‘‘discretionary account’’ and ‘‘non-discretionary account’’). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 to describe their discretionary and nondiscretionary offerings and explaining what that means to retail investors in terms of who makes the ultimate investment decisions can lead to disclosures that are more meaningful and less confusing. We recognize that some investor feedback suggested that further definitions of ‘‘discretionary account’’ and ‘‘non-discretionary account’’ would be useful. While the final instructions do not require prescribed wording including these terms, as the proposed instructions would have required, the final instructions do require investment advisers that accept discretionary authority to use their own wording to explain similar information.315 The final instructions provide that investment advisers that accept discretionary authority will be required to describe these services and any material limitations on that authority.316 Additionally, any such summary must include the specific circumstances that would trigger that discretionary authority and any material limitations.317 Investment advisers may, for example, explain whether they seek the retail investor’s approval before implementing or changing investment strategies or executing certain transactions. In comparison, the proposed instructions took a more prescriptive approach.318 For example, the proposed instructions prescribed wording for investment advisers to include in their relationship summaries if they offer a discretionary account.319 We believe that the more general final instruction provides investment advisers with the flexibility to describe their discretionary offerings more accurately. For broker-dealers, the final instructions provide that they may, but are not required to, state whether they accept limited discretionary authority.320 We have made this 2.B.(ii) to Form CRS. 2.B.(ii) of Form CRS. 317 Item 2.B.(ii) of Form CRS. 318 Compare Item 2.B.(ii) of Form CRS with Proposed Item 2.C.3 of Form CRS (‘‘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 nondiscretionary) in bold and italicized font.’’). 319 See Proposed Item 2.C.3. of Form CRS (‘‘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.’’). 320 Compare Item 2.B.(ii) of Form CRS with Proposed Item 2.B.2, which instructed brokerdealers: ‘‘If you offer accounts in which you offer recommendations to retail investors, state that the retail investor may select investments or you may PO 00000 315 Item 316 Item Frm 00203 Fmt 4701 Sfmt 4700 33519 disclosure optional for broker-dealers because of our understanding that these services may not be a significant part of broker-dealers’ services.321 Accordingly, describing them here may detract from disclosure of other items that better characterize the firm’s business and would be more helpful to investors. If limited discretion services are a significant part of a broker-dealer’s business, for example, if limited discretion services constitute material facts relating to the scope and terms of the relationship with the retail customer that need to be disclosed under Regulation Best Interest, that brokerdealer may wish to include in its relationship summary a statement that it offers limited discretion services. Finally, both broker-dealers and investment advisers that offer nondiscretionary services must explain that the retail investor makes the ultimate decision regarding the purchase or sale of investments.322 Under the proposed instructions, firms would have been required to explain whether they offer non-discretionary services and what that means, but using prescribed wording. Investment advisers would have been required to state that they give advice and the retail investor decides what investments to buy and sell.323 Broker-dealers would have been required to state that the retail investor will make the ultimate investment decision regarding the investment strategy and the purchase or sale of investments, in addition to other prescribed wording to distinguish execution-only accounts from those in which the broker-dealer would offer recommendations.324 The final 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.’’ 321 See discussion on discretionary authority in Solely Incidental Release, supra footnote 47; see also footnotes 284–286 and accompanying text. 322 Item 2.B.(ii) of Form CRS. 323 See Proposed Instruction to Item 2.C.3. of Form CRS (‘‘If you offer a non-discretionary account, state that you give advice and the retail investor decides what investments to buy and sell.’’). 324 See Proposed Item 2.B.2. of Form CRS (‘‘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 E:\FR\FM\12JYR2.SGM Continued 12JYR2 33520 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 instructions require firms to explain to retail investors that they make the ultimate investment decision in nondiscretionary accounts, but do not include requirements to use prescribed wording or references to account types. This change is consistent with our general approach described above that such prescribed wording may be confusing or may not sufficiently cover the discretionary and non-discretionary services a firm may offer.325 Limited Investment Offerings. The final instructions require firms to explain whether or not they make available or offer advice only with respect to proprietary products, or a limited menu of products or types of investments. If so, they must also describe the limitations.326 In comparison, the proposed instructions included prescribed wording for firms to include if they significantly limit the types of investments in any accounts.327 Specifically, broker-dealers would have stated, ‘‘We offer a limited selection of investments. Other firms could offer a wider range of choices, some of which might have lower costs.’’ 328 Investment advisers would have stated, ‘‘Our investment advice will cover a limited selection of investments. Other firms could provide advice on a wider range of choices, some of which may have lower costs.’’ 329 The proposed instructions gave examples of what might constitute a significant limitation on the types of investments, specifically, offering only one type of asset (e.g., mutual funds, exchangetraded funds, or variable annuities); mutual funds or other investments sponsored or managed by the firm or an affiliate, i.e., proprietary products; or only a small number of investments.330 If these limits applied only to certain accounts in which you do not offer recommendations to retail investors (e.g., executiononly 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.’’). 325 See, e.g., CFA Letter I (suggesting that Form CRS should require advisers to discuss only what they offer in terms of discretionary or nondiscretionary accounts, because discussing both types when they offer only one would confuse investors); IAA Letter I (suggesting that the proposed prescribed wording would not cover sufficiently the variety of discretionary or nondiscretionary advisory services a firm may offer and offering alternative language). 326 Item 2.C.(iii) of Form CRS. 327 The Proposed Items stated, ‘‘If you significantly limit the types of investments available to retail investors in any accounts, include the following . . . .’’ Proposed Items 2.B.4. and 2.C.4. of Form CRS. 328 Proposed Item B.4. of Form CRS. 329 Proposed Item C.4. of Form CRS. 330 Proposed Items B.4. and C.4. of Form CRS. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 accounts the proposed instructions would have required firms to identify those accounts.331 Comments were mixed on the proposed instruction concerning limited investment offerings. Several commenters acknowledged the importance of investors understanding limitations on investments.332 Results of RAND 2018 qualitative interviews also indicated that investors would like to understand limits on investment offerings.333 Some commenters expressed concerns that the proposed disclosure would not be of sufficient value to investors.334 A number of commenters, whether or not they supported generally requiring firms to discuss limitations on investments, expressed concerns that the scope of ‘‘significantly limits’’ in the proposed instructions or ‘‘limited selection of investments’’ was not sufficiently clear.335 Furthermore, a few commenters expressed concern that the prescribed wording (‘‘Other firms could offer a wider range of choices, some of which might have lower costs.’’) unduly prioritized cost over other investment product features or characteristics.336 Items B.4. and C.4. of Form CRS. CFA Letter I; CFA Institute Letter I; New York Life Letter; see also mock-ups submitted by commenters that included the ‘‘limited selection of investments’’ wording or substantially similar wording. See Fidelity Letter; IAA Letter I; IRI Letter. These mock-ups did not elaborate on what the limitations are. 333 See RAND 2018, supra footnote 13 (from qualitative interviews, finding that ‘‘[p]articipants reacted strongly to the notion of being offered limited investment options’’). 334 See CFA Letter I (‘‘[W]e fear the proposed disclosure provides too little information to be of value to the investor.’’); CFA Institute Letter I (suggesting that the disclosure expressly state that performance may be lower due to higher costs). 335 See CFA Letter I (‘‘But simply stating they offer ‘‘limited’’ investments is not enough, as that will mean different things to different investors.’’); Prudential Letter (‘‘It is unclear what ‘significantly limits’ means for firms that offer predominantly, but not exclusively, proprietary products. It is also unclear what constitutes a ‘small choice of investments.’ Additional examples or more prescriptive instructions regarding when firms must disclose such limitations would be helpful.’’); CFA Letter I (‘‘[F]irms should have to describe how they limit the selection of investments.’’); Wells Fargo Letter (‘‘This requirement appears to be overly broad as no firm can offer all investments and we therefore recommend that this be limited to those broker-dealers that only offer one type of product.’’). 336 See, e.g., New York Life Letter (‘‘[T]he Commission’s exclusive emphasis on cost in this prescribed sentence does not provide consumers of insurance products with clear and complete information.’’); Mutual of America Letter (‘‘We believe that this focus on cost alone is not necessarily in the best interest of retail consumers, who may benefit from high-value products, such as variable annuities.’’); Lincoln Financial Group Letter (suggesting that either the Form CRS or Regulation Best Interest disclosure obligation should allow for descriptions of product benefits to PO 00000 331 Proposed 332 See Frm 00204 Fmt 4701 Sfmt 4700 We continue to believe that firms that limit product menus—such as offering only proprietary products or a specific asset class—should be required to describe those limitations in the relationship summary.337 Other examples include limitations based on products that involve third-party arrangements, such as revenue sharing and mutual fund service fees. We agree with commenters who advocated for helping investors before entering into a relationship with a firm to understand whether a firm limits its product offerings, and to what extent.338 In light of comments, we have determined, however, that the proposed prescribed wording may not allow all firms to describe limited investment offerings, if applicable, in a way that is accurate and helpful to investors, and are not requiring it in the final instructions.339 Accordingly, we are revising the instructions to require firms to address whether or not they make available or offer advice only with respect to proprietary products or a limited menu of products or types of investments, and if so, to describe such limitations.340 We believe that the final instructions address the same types of limitations on investments that the proposed instructions sought to address, but in a less prescriptive way, and allow firms to describe their investment offerings more accurately to reflect their scope of products and services. Account Minimums and Other Requirements. The final instructions also include a requirement to explain whether or not the firm has any requirements for retail investors to open or maintain an account or establish a relationship, such as minimum account retail investors as well as costs). Another commenter noted that the prescribed wording about other firms’ offerings could raise First Amendment concerns. See CFA Letter I (‘‘[R]equiring firms to compare their own services unfavorably to those of their competitors may raise First Amendment concerns.’’). See supra footnotes 77–85 and accompanying text. 337 The proposed instructions stated, ‘‘If you significantly limit the types of investments available to retail investors in any accounts, include the following . . .’’ Proposed Items 2.B.4. and 2.C.4. of Form CRS. In order to give firms more flexibility to describe limitations on products or investment types in the context of their business models, and to avoid potential confusion with the materiality threshold of Regulation Best Interest (which requires disclosure of all material facts relating to the type and scope of services provided to the retail customer, including any material limitations on the securities or investment strategies involving securities that may be recommended to the retail customer), we have eliminated the word ‘‘significantly’’ from the final instructions. Regulation Best Interest Release, supra footnote 47. 338 See CFA Letter I; CFA Institute Letter I. 339 See supra footnotes 77–85 and accompanying text. 340 Item 2.C.(iii) of Form CRS. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations size or investment amount, which is a change from the proposal.341 In response to our request for comments on such possible requirements, commenters recommended that we include this information in the relationship summary.342 In addition, a number of commenters submitting mock-ups included disclosures on account minimums in their forms.343 We agree that this is important for retail investors to understand because many firms offer a number of services that are only available to investors with higher account balances.344 Furthermore, fee schedules may be tiered based on account balances.345 Investors benefit from being aware of and seeing a range of options in the same context, as discussed above. We believe investors can use information about different account requirements for both current and future decision-making purposes. Thus, the final instructions require firms to address whether or not they have any requirements for retail investors to open or maintain an account or establish a relationship, such as a minimum account size or investment amount. b. Additional Information In a change from the proposal we are requiring firms to provide specific references to more detailed information about their services that, at a minimum, include the same or equivalent information to that required by the Form ADV, Part 2A brochure (Items 4 and 7 of Part 2A or Item 4.A and 5 of Part 2A Appendix 1) and Regulation Best Interest, as applicable.346 Broker-dealers that do not provide recommendations subject to Regulation Best Interest (e.g., execution-only broker-dealers) are not required to prepare more detailed information about their services, but to the extent they do, must include references to such information in their jbell on DSK3GLQ082PROD with RULES2 341 Item 2.C.(iv) of Form CRS. 342 See, e.g., NASAA Letter (stating that Form CRS should include a disclosure, specifying the minimum account size and include information on miscellaneous fees different categories of investors can expect to pay); see also Cetera Letter I (stating that firms should disclose as material conflict of interest whether or not they have established standards for the minimum or maximum dollar amount of various account types). 343 See, e.g., Primerica Letter; Cetera Letter I. 344 See, e.g., SIFMA Letter (stating that investment advisory services typically require a minimum account balance); ACLI Letter; Comment Letter of the National Association of Insurance and Financial Advisors (Aug. 2, 2018) (‘‘NAIFA Letter’’). 345 See, e.g., Cetera Letter II (mock-up) (explaining tiered fee schedule). 346 Item 2.C. of Form CRS. See Regulation Best Interest Release, supra footnote 47, at Section II.C.1. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 relationship summaries.347 The final instructions require firms to use text features to make this additional information more noticeable and prominent in relation to other discussion text.348 As with other references to additional information, firms may include hyperlinks, mouse-over windows, or other means of facilitating access to this additional information and to any additional examples or explanations of such services.349 This allows firms to summarize their services while making available more detailed and fulsome information for retail investors, in keeping with the design of the relationship summary as a short, succinct disclosure with links to additional information, as commenters and investors asked. We believe that requiring firms to make retail investors aware of the services they offer, at a high level, and where retail investors can obtain more detailed information through layered disclosure, will best engage retail investors and help them make more informed decisions when choosing from among firms, services, or accounts. c. Conversation Starters Firms will include in this section of the relationship summary three prescribed conversation starters for retail investors to ask their financial professional.350 As discussed in Section II.A.4, these questions are taken from the Key Questions to Ask section in the proposed relationship summary, which a considerable majority of investors indicated were helpful.351 Brokerdealers and investment advisers that are not dual registrants will include, respectively, ‘‘Given my financial situation, should I choose a brokerage service? Why or why not?’’ or ‘‘Given my financial situation, should I choose an investment advisory service? Why or why not?’’ 352 Dual registrants will 347 Item 2.C. of Form CRS. See Regulation Best Interest Release, supra footnote 47, at Sections II.A., II.C.1. 348 General Instruction 4.C. to Form CRS. For example, firms could use larger or different font; a text box around the heading or questions; bolded, italicized, or underlined text; or lines to offset the information from other sections. 349 Item 2.C. of Form CRS. 350 Item 2.D. of Form CRS. 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, including statements made in response to the relationship summary’s ‘‘conversation starters.’’ See supra footnote 98 and accompanying text. 351 See supra footnotes 174–178 and accompanying text. 352 Items 2.D.(i) and 2.D.(ii) of Form CRS. PO 00000 Frm 00205 Fmt 4701 Sfmt 4700 33521 include ‘‘Given my financial situation, should I choose an investment advisory service? Should I choose a brokerage service? Should I choose both types of services? Why or why not?’’ 353 These questions are largely the same as the first proposed Key Question but replace the terms ‘‘brokerage account’’ and ‘‘advisory account’’ with ‘‘brokerage service’’ and ‘‘investment advisory service,’’ respectively.354 This revision addresses comments that the concept of ‘‘accounts’’ may not align with all firms’ business models and may cause investor confusion.355 In addition, some commenters stated that it was inappropriate for the Commission to require firms to describe products and services that they do not offer and about which they may have limited or no expertise.356 Although the proposed instructions permitted firms to modify the first Key Question to reflect the type of accounts they offer to retail investors, we are replacing it with three formulations that are explicitly tailored to firm type in order to clarify that firms are obligated to discuss only the services that they offer. Finally, we have rephrased the questions as ‘‘Should I choose [a/an brokerage/advisory] service? Why or why not?’’ rather than ‘‘Why should I choose [a/an brokerage/ advisory] service?’’ to avoid a presumption that the relevant service will always be an appropriate service for the retail investor. The questions are designed to prompt a conversation relevant to the specific retail investor’s circumstances. All firms also will include the questions ‘‘How will you choose investments to recommend to me?’’ and ‘‘What is your relevant experience, including your licenses, education and other qualifications? What do those qualifications mean?’’ 357 These questions are nearly identical to proposed Key Questions numbers six and nine except, again, for the removal of the account concept from proposed Key Question number six, and a minor revision to proposed Key Question number nine to encourage retail investors to ask a broader question regarding the financial professional’s 353 Item 2.D.(iii) of Form CRS. Proposed Item 8.1 of Form CRS (‘‘Given my financial situation, why should I choose an advisory account? Why should I choose a brokerage account?’’). We did not receive specific comments on this question, though some commenters included it or a variation thereof in their mock-ups. See, e.g., Betterment Letter I; IRI Letter. 355 See supra footnote 80 and accompanying text. 356 E.g., ACLI Letter; IAA Letter I. 357 Items 2.D.(iv) and 2.D.(v) of Form CRS. 354 Cf. E:\FR\FM\12JYR2.SGM 12JYR2 33522 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 qualifications.358 We believe that answers to these questions will be helpful to retail investors as they make their choices. In addition, a significant majority of participants from the RAND 2018 survey indicated that they would feel comfortable asking any of the Key Questions.359 Although fewer participants indicated that they would feel ‘‘very comfortable’’ asking about the financial professional’s experience and qualifications, compared with the other two questions,360 we believe that including this question serves as a useful reminder both to investors who would feel comfortable and as encouragement to those who are hesitant that asking such a question is acceptable. Requirements Removed from the Proposed Instructions. The final instructions do not include several specific requirements that were proposed in this item. First, the proposal would have required firms to describe their transaction-based fees and asset-based fees in this section, in addition to the more specific fee information required in a separate fee section.361 We learned from an investor study submitted by commenters that dispersing information on the same topic throughout several sections of the relationship summary or separating that information with an unrelated topic could confuse investors.362 This 358 Proposed Key Question number six asked ‘‘How will you choose investments to recommend for my account?’’ Proposed Key Question number nine asked ‘‘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.’’ Proposed Items 8.6 and 8.9 of Form CRS. 359 RAND 2018, supra footnote 13 (finding that at least two-thirds and up to 85% of survey participants indicated that they would be ‘‘somewhat comfortable’’ or ‘‘very comfortable’’ asking any of the Key Questions, including which account to choose and why, how investments would be selected for them, and what the financial professional’s experience and qualifications were); see also Betterment Letter I (Hotspex) supra footnote 18 (reporting that 93% of survey participants who viewed a version of the sample standalone adviser relationship summary in the proposal indicated that they were somewhat or very likely to ask the suggested questions.). 360 RAND 2018, supra footnote 13. 361 See Proposed Items 2.B.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.’’) and 2.C.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.’’) of Form CRS. 362 See Kleimann I, supra footnote 19 (‘‘[W]hile the Brokerage Account was defined as using VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 illustrated the importance of establishing sufficient context and increasing the salience of related information by ensuring that it is kept together in the relationship summary. We agree that fee information should be provided together, and have eliminated fee disclosures from the Relationship and Services section to locate it with other fee information in an effort to reduce investor confusion. In addition, the final instructions do not require firms to describe regular communications with retail investors, including frequency and method, as proposed. Comments were mixed on the proposed instruction. One commenter expressed the view that proposed Form CRS suggested that firms should contact advisory clients by phone or email every quarter and disagreed with this implication. The commenter recommended that instead of mandating the form or frequency of contact with clients, the Commission should continue to give advisory clients flexibility to communicate how and when they want, as long as investment advisers are meeting their obligations under the Advisers Act.363 Another commenter noted that misunderstandings concerning brokerdealers’ duty or intention to monitor accounts can be avoided by proper communications, most importantly at the time the relationship is formed.364 Mock-ups submitted by commenters generally did not refer to or describe communications between the firm or financial adviser and the investor.365 The proposal was not designed to mandate the form or frequency of contact with clients. Nonetheless, given these mixed responses, our goal of keeping the relationship summary focused on a limited amount of information, and to allow more flexibility for firms to describe their services more accurately and meaningfully, firms will not be required to describe the frequency and method of their regular communications with retail investors. Firms may include this information, however, to help investors better understand the services provided. transaction-based fees and the Investment Advisory Account as using asset-based fees in the first section, in the Costs and Fees section, the Investment Adviser Services column also discusses transaction fees. This ‘contradictory’ repetition was confusing to participants.’’). 363 See Edward Jones Letter. 364 See Schnase Letter. 365 But see Cetera Letter II (‘‘Regardless of the program chosen, your IAR is responsible for ongoing review of your account(s), regular communication with you . . . .’’). PO 00000 Frm 00206 Fmt 4701 Sfmt 4700 3. Summary of Fees, Costs, Conflicts, and Standard of Conduct In response to comments, feedback from investors at roundtables and on Feedback Forms, and observations reported by the RAND 2018 report and other surveys and studies, we are adopting changes to the relationship summary’s required discussion of fees, costs, conflicts of interest, and standard of conduct. Commenters generally supported the Commission’s goal of providing investors with reliable and straightforward information about the fees they pay, the standard of conduct applicable to financial professionals, and conflicts of interest relating to financial professional compensation.366 Some suggested that the fee disclosure should be more prominent in the proposed relationship summary and located towards the front of the relationship summary and also suggested modifications to sections of the relationship summary addressing financial professional conflicts of interest and standards of conduct.367 Results of the RAND 2018 report and other surveys and studies showed that investors view information about fees and costs as one of the most important of the proposed sections of the relationship summary.368 Investor 366 See, e.g., CFA Institute Letter I (noting that ‘‘we support efforts to help retail investors educate themselves on the differences between brokerdealers and investment advisers—in terms of services offered, fees they charge, conflicts of interest, and importantly, the standard of care under which each operates’’); Fidelity Letter (‘‘Form CRS should . . . inform investors of the types of fees they may incur and direct them, via a link, to more detailed disclosure.’’); Comment Letter of the Investment Adviser Association (Dec. 4, 2018) (‘‘IAA Letter II’’) (describing ‘‘fees and expenses to be paid, legal obligations, conflicts of interest’’ as disclosure items that are ‘‘more critical than others’’); Comment Letter of the University of Miami School of Law (Aug. 2, 2018) (‘‘Investors should be provided with clear and concise information that fully and fairly discloses the specific charges he or she will incur as a result of the particular recommendation.’’); NAIFA Letter (agrees that clients should receive ‘‘early in the client-advisor relationship—all of the information in the SEC’s proposal’’ which would include: ‘‘fees and charges . . . material conflicts of interest associated with a recommendation (to the extent known at the time of disclosure); [and] standards of conduct applicable to the services offered’’); see also AARP Letter (recommending reformatting of Form CRS to meet ‘‘critical core components’’ including that ‘‘standard of care should be clear, concise and defined’’ [and] ‘‘fee structure should be straightforward and avoid technical jargon’’); CCMC Letter (in connection with investor polling, noting that investors identify explaining ‘‘fees and costs,’’ ‘‘own compensation,’’ and ‘‘conflicts of interest’’ as ‘‘issues that matter most’’ to investors). 367 See, e.g., mock-ups in IAA Letter I; Robinson Letter; SIFMA Letter; Fidelity Letter; Schwab Letter I. 368 RAND 2018, supra footnote 13 (more than 70% of survey respondents selected the fees and costs section as one of the most informative; this E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 feedback at roundtables and through Feedback Forms also showed the importance of fees and cost information to investors.369 However, the RAND 2018 survey and other surveys and studies also indicated that the proposed relationship summary presentation of fee and cost information could be difficult for investors to understand.370 The RAND 2018 survey and other surveys and studies also suggested that investors found sections in the proposed relationship summary covering the obligations of financial professionals and conflicts disclosure less informative,371 and indicated that investors could have difficulty understanding and synthesizing information about the obligations of financial professionals and the impact section was least likely to be selected as not informative); see also Cetera II Letter (Woelfel) supra footnote 17 (reporting that 88% of survey respondents agreed that it is very or somewhat important to cover ‘‘fees and costs associated with those services’’); Schwab Letter I (Koski) supra footnote 21 (reporting that 63% of survey respondents ranked ‘‘costs I pay for investment advice’’ as one of the four most important things for firms to communicate); CCMC Letter (investor polling) supra footnote 21(describing ‘‘explaining fees and costs’’ as one of three issues that ‘‘matter most’’ to investors). 369 See, e.g., Houston Roundtable; Atlanta Roundtable; Philadelphia Roundtable; Miami Roundtable; Washington, DC Roundtable; Denver Roundtable; Baltimore Roundtable; CFA Letter I; see also Feedback Forms Comment Summary, supra footnote 11 (responses to Question 2(c)) (over 80% of commenters graded the section on fees and costs as ‘‘very useful’’ or ‘‘useful’’). 370 RAND 2018, supra footnote 13 (40% of survey respondents rated fees and costs section difficulty as ‘‘just right’’ while 35% rated the fees and cost section as difficult or very difficult; in qualitative interviews, participants generally found the section to be important, but also overwhelming and had trouble with language); see also Kleimann I, supra footnote 19 (‘‘Participants expected to pay for transactions in a Brokerage Account or the quarterly fee for an Advisory Account, but they were surprised by the proliferation of additional fees . . . commented on the introduction of many new terms and wanted definitions. . .’’); Cetera Letter II (Woelfel) supra footnote 17 (78% of survey respondents agreed strongly or somewhat agreed that fees and costs were clearly described, well below ratings for clarity of information about services and obligations). 371 See RAND 2018, supra footnote 13 (almost one quarter of survey respondents selected ‘‘our obligations to you’’ as one of the least informative sections, only one third selected the section as one of the two most informative; the conflicts of interest section was selected as one of the two most informative by only 15% of respondents and as one of the least informative by more than a third); see also Cetera Letter II (Woelfel), supra footnote 17 (largest percent of survey respondents (88%) strongly or somewhat agreed that the ‘‘our obligations to you’’ topic was important; smallest percent (81%) strongly or somewhat agreed that conflicts of interest was important); CCMC Letter (investor polling) supra footnote 21(describing ‘‘explaining fees and costs,’’ ‘‘explaining own compensation,’’ and ‘‘explaining conflicts of interest’’ as three issues that ‘‘matter most’’ to investors). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 of conflicts of interest.372 As discussed more fully below, we considered all of this feedback, as well as comments received, in redesigning the disclosures related to the topics. A new Item 3 will require the relationship summary to cover three areas: (i) Fees and costs; (ii) standard of conduct and conflicts of interest; and (iii) financial professional compensation and related conflicts of interest. Some of the key elements of these disclosures include: • Integrated sections covering fees, costs, conflicts of interest, and standard of conduct. We have modified the proposal by combining the fees and costs section and the sections discussing conflicts of interest and standard of conduct into one Item 3 that will require three consecutive sections. These sections will help illustrate the interconnectedness of fees, costs, conflicts, and standard of conduct, and will keep these related disclosures close in proximity to each other. • Distinct summaries of principal fees and costs other fees and costs, and other ways the firm makes money. We are also requiring separate sections discussing certain fees and costs, with one section discussing principal fees and costs, another section discussing other fees and costs related to the firm’s services and investments, and another section discussing other ways the firm and its affiliates make money. We are not requiring firms to discuss all of the fees and costs together as proposed, to address comments and feedback that the section was complicated and overwhelming. We are also requiring a firm to include cross-references to more detailed information about the firm’s fees. • A description of the standard of conduct with conflicts. We are placing the description of the standard of conduct under the same heading as a summary of conflicts in order to help retail investors better understand the 372 See RAND 2018, supra footnote 13 (in qualitative interviews, some participants struggled with understanding differing obligations for different account types and reconciling information in the conflicts of interest section with the ‘‘our obligations to you’’ section); Kleimann I, supra footnote 19 (‘‘Few participants could define ‘‘fiduciary standard’’; participants explaining firms’ financial relationships that could create potential conflicts ‘‘had difficulty explaining how firms earned money from these relationships . . . often absent from these explanations was a discussion of the negative impact that these practices would have on them.’’); Betterment Letter I (Hotspex), supra footnote 18 (reporting survey results indicating that some investors viewing a version of the sample proposed standalone adviser relationship summary had difficulty answering correctly questions about financial professional obligations and conflicts of interest). PO 00000 Frm 00207 Fmt 4701 Sfmt 4700 33523 relationship between the standard of conduct and conflicts. • Broadening the types of conflicts disclosure. We are requiring firms to disclose information on the topics that were required in the proposal—i.e., proprietary products, third-party payments (shelf space and revenue sharing arrangements), and principal trading. But we are requiring firms without these conflicts to disclose at least one material conflict. We are also requiring a firm to include crossreferences to more detailed information about the firm’s conflicts of interest. • Financial professional compensation. We are adding a separate section that will require a firm to highlight how its financial professionals are compensated and the conflicts of interest those payments create. This disclosure will distinguish firm-level from financial professional-level conflicts. The proposal would have included one section summarizing fees and costs, one section summarizing conflicts of interest, and one section discussing the applicable standards of conduct. The principal fees were also discussed at the beginning of the services section, and for standalone investment advisers and broker-dealers, the section discussing fees and costs and the section discussing conflicts of interest were separated by a section discussing comparisons between investment advisers and broker-dealers. Commenters suggested locating fee and conflict disclosures more closely together, and several sample relationship summaries submitted by commenters placed the fees and conflicts sections in close proximity to each other.373 As noted, we learned from an interview-based study submitted by a commenter that investors could have trouble connecting related information when those sections were not closely located.374 Observations in the RAND 2018 qualitative interviews and comments submitted on Feedback Forms also suggested that investors’ level of understanding varied significantly with regard to the relationship between the applicable standard of conduct and conflicts, and that investors might be more confused by this relationship when the relationship summary placed these sections far apart from one 373 See, e.g., LPL Financial Letter; Betterment Letter I; Primerica Letter; SIFMA Letter; Wells Fargo Letter; Schwab Letter I. 374 See supra footnote 362 and accompanying text. E:\FR\FM\12JYR2.SGM 12JYR2 33524 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations another.375 We agree that it is important to illustrate the relationship between fees, conflicts, and standards of conduct. We are therefore combining in Item 3 of the final instructions the discussions on fees and costs with discussions of firms’ conflicts of interest, and combining the standard of conduct discussion with the discussion of certain other conflicts of interest. a. Description of Principal Fees and Costs and Other Fees jbell on DSK3GLQ082PROD with RULES2 Similar to the proposal, firms will be required to summarize the principal fees and costs that retail investors incur with respect to their brokerage and investment advisory accounts, and the conflicts of interest they create. As noted above, commenters generally supported the Commission’s goal of providing investors with reliable and straightforward information about the fees they pay and suggested making this information more prominent and located towards the front of the relationship summary.376 Similarly, observations in the RAND 2018 report, and other surveys and studies, and comments from investors at roundtables and in Feedback Forms, overwhelmingly supported including fee disclosure in the relationship summary and showed that investors believe that information about fees and costs is important to understanding their relationship with a financial professional.377 The RAND 2018 survey reported, however, that survey participants were more likely to rate the proposed relationship summary section on fees and costs as ‘‘difficult’’ or ‘‘very difficult’’ to understand and would add 375 See RAND 2018, supra footnote 13 (in qualitative interviews, participants struggled to reconcile information in the conflicts of interest section with obligations section). Among commenters on Feedback Forms who indicated that the relationship summary was too technical or that topics could be improved, many commented that sections addressing fees and costs, obligations and conflicts of interest needed clarification or better explanation. See Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 4). Some Feedback Form commenters suggested changes to the order of information about fees, conflicts and obligations or offered other comments suggesting that the order of the topics was confusing. See Anonymous28 Feedback Form (‘‘Conflicts of Interest should come right after Obligations to You.’’); Asen Feedback Form (‘‘Somewhat I would prefer to see conflicts before fees’’); Lee2 Feedback Form (comment responding to Question 3(b), whether order is appropriate, ‘‘[c]onflicts seems buried too deeply’’); Smith1 Feedback Form (‘‘The transactions comment in the fees section seems like it would also fall under the conflicts of interst [sic] section’’). 376 See supra footnotes 366–367 and accompanying text. 377 See supra footnotes 368–369 and accompanying text. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 more detail.378 In the RAND 2018 qualitative interviews, participants generally understood that this section would provide information on the types of fees they could possibly pay, but also found the section overwhelming with the number of various types of fees and had some difficulty with language, including certain terms.379 Some participants also did not appear to synthesize information about fees and conflicts of interest to be able to apply it.380 Other surveys and studies, and comments provided on Feedback Forms, also indicate that investors both want additional information about fees and costs and found this information difficult to understand.381 Several commenters also said that information on fees and costs was not straightforward and used too much technical jargon.382 In addition, the IAC recommended that the Commission adopt a uniform, plain English document that covers basic information about fees and compensation, among other topics.383 The Feedback Form commenters and observations reported in the RAND 2018 report and other surveys and studies reaffirms our view that it is critical for retail investors to better understand the fees and costs incurred with their investments and 378 See RAND 2018, supra footnote 13 (in the RAND 2018 survey about 40% rated the difficulty of the section on fees and costs as ‘‘just right’’ and 35% rated the section on fees and costs as ‘‘difficult’’ or ‘‘very difficult’’; about 30% of survey respondents suggested adding more detail). 379 See RAND 2018, supra footnote 13 (‘‘Participants struggled with terms in this section. . . . Words that participants flagged include ‘markup,’ ‘markdown,’ ‘load,’ ‘surrender charges,’ ‘wrap fee’ and ‘custody.’ ’’). 380 See RAND 2018, supra footnote 13 (‘‘[O]ne participant could clearly put differences in fees related to each type of account [but] when asked about which type of financial professional has an incentive to encourage investors to buy and sell securities frequently . . . incorrectly answered.’’). 381 See Kleimann I, supra footnote 19 (finding that ‘‘[p]articipants expected to pay for transactions in a Brokerage Account or the quarterly fee for an Advisory Account, but they were surprised by the proliferation of additional fees. . . . Participants also commented on the introduction of many new terms); Cetera Letter II (Woelfel) supra footnote 17 (78% of survey respondents strongly or somewhat agreed that information on fees and costs was clearly presented, rating below sections describing the firm’s obligations and the services that the firm provides.); Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 4) (41 commenters on Feedback Forms (44%) indicated that one or more topics on the relationship summary is too technical or could be improved; 23 included comments indicating that information about fees and costs is too technical or needed to be more clear). 382 See e.g., IAA Letter I (stating that retail investors are unlikely to understand the use of ‘‘technical terms and industry jargon’’ with respect to fees in the relationship summary); see also AARP Letter; Fidelity Letter. 383 See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10. PO 00000 Frm 00208 Fmt 4701 Sfmt 4700 related conflicts of interest. This section has been revised to further our policy objective of helping investors better understand such fees, costs, and conflicts of interest. Description of Principal Fees and Costs. First, using the heading ‘‘What fees will I pay?’’,384 firms will summarize their principal fees and costs that retail investors will incur for brokerage or investment advisory services, including how frequently such fees are assessed and the conflicts of interest they create.385 Broker-dealers must describe their transaction-based fees 386 and investment advisers must describe their ongoing asset-based fees, fixed fees, wrap fee program fees, or other direct fee arrangements.387 The fees described by investment advisers should align with the type of fee(s) disclosed in response to Form ADV Part 1A, Item 5.E, but they should be summarized in a way that provides retail investors a high-level overview.388 Although the proposal required firms to include information about their principal fees and costs, much of the wording was prescribed. For instance, the proposed instructions included prescribed wording to describe transaction-based fees and asset-based fees and the incentives that each of those fees create.389 The proposed instructions also required firms to use technical terms and explain their definitions (e.g., ‘‘mark-up’’ or ‘‘mark384 Item 3.A. of Form CRS. 3.A.(i) of Form CRS. 386 Item 3A.(i)(a) of Form CRS. 387 Item 3.A.(i)(b) of Form CRS. 388 Item 3.A.(i)(b) of Form CRS. In addition, investment advisers must include information about each type of fee they report in Form ADV that is responsive to Item 3.A. of Form CRS. 389 Dual registrant broker-dealers, for example, were required to include the following wording on 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.’’ Proposed Item 4.B.1. of Form CRS. Dual registrant investment advisers were required to include the following wording on 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.’’ If the asset manager charged another type of fee instead of an asset-based fee, it was required to briefly describe that fee and how frequently it was assessed. Investment advisers that charged an ongoing assetbased fee would have been required to 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.’’ Brokerdealers would have been 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.’’ Proposed Items 4.B.5. and 4.C.8. of Form CRS. 385 Item E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 down,’’ ‘‘load,’’ and ‘‘custody’’).390 Additionally, firms providing advice about investing in wrap fee programs were required to include several more prescribed sentences.391 Finally, dual registrants were required to state when a retail investor may prefer a brokerage or investment advisory service from a cost perspective,392 and wrap fee program providers had to explain when a retail investor may prefer a wrap fee program.393 Commenters argued that in many cases the prescribed wording was confusing and not accurate.394 For 390 Broker-dealers were required to state 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.’’ Proposed Item 4.B.2.(a) of Form CRS. Investment advisers were required to state, if applicable, that ‘‘a retail investor will pay fees to a broker-dealer or bank that will hold the retail assets and that this is called custody.’’ Proposed Item 4.C.6. of Form CRS. 391 Investment advisers that provided advice to retail investors about investing in wrap fee programs were required to 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 the investment adviser offered a wrap fee program as well as another type of advisory account, it was required to include: ‘‘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.’’ 392 Dual registrants were required to include the following: ‘‘An asset-based fee may cost more than a transaction-based fee, but you may prefer an assetbased fee if you want continuing advice or want someone to make investment decisions for you.’’ Proposed Item 4.C.10. of Form CRS. 393 Investment advisers that provided advice to retail investors about investing in wrap fee programs were required to include the following (emphasis required): ‘‘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.’’ Proposed Item 4.C.10. of Form CRS. 394 See, e.g., CFA Institute Letter I (suggesting that the Commission revise the proposed wording to reflect the effect on costs in a more even-handed manner); ACLI Letter (stating that the prescriptive nature of the disclosures does not sufficiently allow for diverse business models to be explained); IAA Letter I (stating that the prescribed language comparing investment advisers to broker-dealers does not include important information and may confuse retail investors, and that the prescribed language associated with fees based on assets under management, while technically correct, misses an important point—namely that an adviser earns more when the client’s portfolio performs better and earns less when the portfolio performs less well aligns the adviser’s interest with the client’s interest, rather than the reverse); FSI Letter I (stating that prescribing language in the relationship summary may confuse retail investors); Comment Letter of Paul Hynes (Jul. 31, 2018) (‘‘Paul Hynes Letter’’) (stating that the prescribed wording is inaccurate by suggesting that investment advisers VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 example, several commenters indicated the proposed fee discussion was unnecessarily technical and suggested the relationship summary avoid the use of jargon (e.g., terms like ‘‘asset-based fee’’ and ‘‘load’’) in this section.395 Several roundtable participants also said that they did not understand these terms,396 as did some participants in investor studies and surveys.397 Other commenters noted that the wording in the proposal was too binary.398 Another commenter argued that certain prescribed wording was obvious to retail investors and did not add value to the retail investor.399 In an effort to balance the goal of educating retail investors with the need to provide firms with enough flexibility to tailor the disclosure to their services and investments, we have decided to remove from the Instructions the prescribed wording we proposed about fees and costs.400 Specifically we are replacing the prescribed wording with a requirement to describe the firm’s principal fees and the conflicts of interest they create. We have also included examples in the instructions of statements that would describe certain principal fees. We have concluded, based on consideration of the comments and investor feedback, that the proposed requirements did not reflect the fees for all firms and, depending on firms’ business models, could be confusing. Instead the relationship summary will focus on a high level summary of fees. Having considered comments, we believe this more flexible approach will better facilitate meaningful disclosure in the relationship summary, as well as conversations between the retail investor and his or her financial professional, and help the retail investor can sell variable annuities); ACLI Letter (stating that the Fees and Costs section is replete with required statements that may be unnecessary/misleading). 395 CFA Letter I; AARP Letter; IAA Letter I. 396 See, e.g., Miami Roundtable; Houston Roundtable; Philadelphia Roundtable. 397 See RAND 2018, supra footnote 13 (in qualitative interviews participants asked for definitions of ‘‘transaction-based fee,’’ asset-based fee,’’ and struggled with terms such as ‘‘mark-up,’’ ‘‘mark-down,’’ ‘‘load,’’ surrender ‘‘charges’’ and ‘‘wrap fee’’); see also Kleimann I, supra footnote 19. 398 See, e.g., CFA Letter I; Margolis Feedback Form (stating that the wording assumed that a retail investor would pay either a transaction-based fee or an asset-based fee for a brokerage or advisory account, respectively, and did not capture other fee structures). 399 See Wells Fargo Letter. 400 As discussed further below, we are not eliminating all prescribed wording for this section and are requiring firms to include the following statement: ‘‘You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investments over time. Please make sure you understand what fees and costs you are paying.’’. PO 00000 Frm 00209 Fmt 4701 Sfmt 4700 33525 decide on the types of services that are right for him or her. Additionally, we believe that certain definitions and concepts explained in the proposed relationship summary can be better explained in other ways, such as through layered disclosure that explain technical terms as appropriate for the specific firm (e.g., ‘‘hovers’’).401 Further, requiring firms to draft their own descriptions will allow them to tailor the description to their particular business models, including the fees their prospective customers and clients will most commonly incur, which will make the discussion more accurate and relevant and further help facilitate retail investors’ comprehension. In addition, we are not including the proposed prescribed wording with respect to wrap fee programs.402 Instead, investment advisers that offer these services to retail investors should include disclosure about the relevant fees and conflicts of interest, and explain the program. We are including instructions encouraging investment advisers with wrap fee programs to explain that asset-based fees associated with the wrap fee program will include most transaction costs and fees to a broker-dealer or bank that has custody of these assets, and therefore are higher than a typical asset-based advisory fee.403 We also removed the proposed disclosures about which type of service or account is better for a retail investor. Specifically, the proposal would have required firms to include prescribed wording about when a retail investor may prefer paying a transaction-based fee or an asset-based fee.404 Although 401 Firms are also encouraged to fully explain any technical terms that they use to describe their fees. We also believe that Investor.gov can be a resource for this information, and the relationship summary will highlight Investor.gov/CRS where educational material is available. 402 The proposal required certain prescribed wording describing wrap fee programs. See Proposed Item 4.C.3. of Form CRS. 403 Item 3.A.(i)(b) of Form CRS. 404 The proposal required standalone investment advisers and standalone broker-dealers to state that a retail investor may prefer paying ‘‘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.’’ or ‘‘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.’’ Proposed Items 5.A.4. and 5.B.6. of Form CRS. Dual registrant broker-dealers were required to 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.’’ Proposed Item 4.B.6. of Form CRS. Dual registrant investment advisers that charged an ongoing assetbased fee were required to include the following: ‘‘An asset-based fee may cost more than a E:\FR\FM\12JYR2.SGM Continued 12JYR2 33526 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 some commenters did not object to the proposed prescribed wording and some included it in their mock-ups,405 several commenters raised concerns.406 For example, one commenter argued that the required wording could be false and misleading, noting that the required statements do not take into account that transaction-based fees are not necessarily more affordable for buy-andhold investors who do not trade often, many broker-dealers offer higher-cost investment products (e.g., variable annuities, non-traded REITs, and private placements), and many investment advisers recommend investments with lower operating expenses than those sold by brokers.407 We have concluded that the proposed required wording did not capture all of the information that, in certain circumstances, would be necessary to help retail investors reasonably assess whether a particular service and its associated fees will be better for them. Instead, the relationship summary provides information about what the firm offers and encourages discussion with conversation starters. Such a discussion—facilitated by Form CRS—is more appropriate between the financial professional and the retail investor about the firm’s specific offerings and associated fees and conflicts, and the retail investor’s specific circumstances. The proposal also required firms to state whether their fees vary and are negotiable and to describe the key factors that would help a reasonable retail investor understand the fee that he or she is likely to pay for services.408 In the RAND 2018 qualitative interviews, some participants were confused by the statement about fees being negotiable and most mock-ups commenters submitted did not include this disclosure.409 We did not include this transaction-based fee, but you may prefer an assetbased fee if you want continuing advice or want someone to make investment decisions for you.’’ Proposed Item 4.C.10. of Form CRS. 405 See, e.g., LPL Financial Letter; Betterment Letter I; IRI Letter. 406 See supra footnote 394. 407 See CFA Letter I. 408 Proposed Items 4.B.3. and 4.C.5 of Form CRS. The instructions included examples of such key factors (for a broker-dealer, this may be 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 a firm; for an investment adviser, this may include the services the retail investor receives and the amount of assets in the retail investor’s account). Investment advisers were also required to state that a retail investor could be required to pay fees when certain investments are sold (e.g., surrender charges for selling variable annuities). 409 See RAND 2018, supra footnote 13 (noting that the phrase stating that fees are negotiable and may vary concerned participants, and many noted that it made them feel as if they pay too much). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 requirement in the final instruction. It is important to instead focus the relationship summary on information about fees that retail investors identified as important to their assessment of firms. Given the comments and investor testing results showing that the fee section was technical and difficult to understand, we believe that the final instructions will help investors focus on the information the final instructions do require. We believe that removing information about negotiability should help achieve this objective. In another modification from the proposal, we are requiring firms to discuss the conflicts of interest created by their principal fees and costs rather than prescribing specific wording about those conflicts. We are making this change in response to commenters, who pointed out that the conflicts of interest created by principal fees can vary in more ways than our prescribed wording contemplated.410 Instead of prescribed wording, the final instructions include a requirement that firms explain the conflict of interest their principal fees create, as well as examples of how a firm may communicate certain conflicts of interest. These examples are the same conflicts the proposed instructions required. For instance, a broker-dealer could disclose its conflicts of interest related to transaction-based fees by stating that a retail investor would be charged more when there are more trades in his or her account and that the firm may therefore have an incentive to encourage a retail investor to trade often.411 Investment advisers that charge an asset-based fee could disclose related conflicts of interest by stating that the more assets in a retail investor’s advisory account, the more the retail investor will pay in fees, and the firm may therefore have an incentive to encourage the retail investor to increase the assets in his or her account.412 Firms that offer variable annuity and variable life insurance products could disclose that they have a financial incentive to offer a contract that includes optional benefit features, which may entail Similarly, see Anonymous28 Feedback Form (‘‘If fees are negotiable, when is this done?’’); see also mock-ups in IAA Letter I; Robinson Letter; Primerica Letter; LPL Financial Letter, SIFMA Letter; Schwab Letter I; Fidelity Letter. 410 See, e.g., Comment Letter of Invesco Advisers, Inc. (Aug. 7, 2018) (‘‘Invesco Letter’’); Committee of Annuity Insurers Letter; IAA Letter I; see also CFA Institute Letter I (noting that investors ‘‘will most likely focus on the fees and costs discussion and should be alerted to the fact that in addition to different fee arrangements and structures, different practices and conflicts may also result in higher costs.’’). 411 Item 3.A.(i).a. of Form CRS. 412 Item 3.A.(i).b. of Form CRS. PO 00000 Frm 00210 Fmt 4701 Sfmt 4700 additional fees on top of the base fee associated with the contract, that they may encourage contract owners to select investment options with relatively higher fees, or that they may offer the contract owner a new contract in place of the one that he or she already owns. Finally, we also have included a note in the final instructions that an investment adviser receiving compensation in connection with the purchase or sale of securities should consider the applicability of the broker-dealer registration requirements of the Exchange Act and any applicable state securities statutes.413 Description of Other Fees and Costs. Firms also will be required to describe other fees and costs related to their brokerage and investment advisory services and investments, in addition to the firm’s principal fees and costs, that the retail investor will pay directly or indirectly. Firms must list examples of the categories of the most common fees and costs that their retail investors will pay directly or indirectly.414 Those fees and costs may include, for example, custodian fees, account maintenance fees, fees related to mutual funds and variable annuities, and other transactional fees and product-level fees.415 With regard to product-level fees, in particular, firms may wish to highlight certain fees such as distribution fees, platform fees, shareholder servicing fees and subtransfer agency fees, in order to enhance the retail investor’s understanding of these fees to the extent applicable to the customer’s transactions, holdings, and accounts. We recognize that the fees and costs that a firm determines to be the most common will vary and depend on particular products and services the firm offers and the fee arrangements associated with those products and services. Generally, in making this determination, firms should consider, for example, the amount of the fee (including whether the fee varies based on options the investor may select such as optional benefits and the investment options that a contract owner may select in the context of variable annuities and variable life insurance products), the likelihood that the fee will be applicable, whether the fee is ordinarily assessed on a significant number of the firm’s clients, whether the fee is associated with a product or service that the firm frequently recommends or provides, whether the fee is contingent 413 See Item 3.A.(i).b of Form CRS. This statement is consistent with Part 2A of Form ADV. 414 Item 3.A.(ii) of Form CRS. 415 Item 3.A.(ii) of Form CRS. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 upon certain events the investor should be made aware of, the effect on returns, and the magnitude of the conflict of interest it may create. For example, an investment adviser should consider discussing commissions that are charged when an investment is bought or sold. A firm that commonly offers an investment that includes a surrender fee—for example, a variable annuity or variable life insurance contract is sold as a long-term investment that may entail relatively high surrender fees— should consider disclosing that a retail investor could be required to pay fees when certain investments are sold. The proposal similarly required firms to state that retail investors will pay other fees in addition to the firm’s principal fees. Like the final instructions, the proposal required disclosure of the other fees related to the services or account such as custodian fees, account maintenance fees, and account inactivity fees, and included these other fees in the same section discussing the firm’s principal fees.416 The proposal also required that all firms disclose that certain investments imposed additional fees, including fees that reduce the value of investments over time (e.g., mutual funds and variable annuities) and fees paid when an investment is sold (e.g., surrender charges for selling variable annuities).417 Observations reported from RAND 2018 qualitative interviews and another study indicated that some investors could become overwhelmed with the number of various types of fees and many were surprised that so many different types of fees could apply in addition to a firm’s principal fee.418 At the same time, investors participating in surveys and studies and investors providing comments on Feedback Forms have indicated that more 416 Proposed Items 4.B.4. and 4.C.6. of Form CRS. Specifically, the proposal required broker-dealers to state, if applicable, that a retail investor will pay other fees in addition to the firm’s principal fees, including, but not limited to, custodian fees, account maintenance fees and account inactivity fees. The proposal required investment advisers to state, if applicable, that a retail investor will pay transaction-based fees when it buys and sells an investment for the retail investor and that retail investors will pay, if applicable, custodian fees, and other fees such as those for account maintenance services. 417 Proposed Items 4.B.2.(b) and 4.C.4. of Form CRS. 418 RAND 2018, supra footnote 13 (qualitative interview results); Kleimann I, supra footnote 19. Similarly, see Anonymous02 Feedback Form (‘‘Do companies charge all these fees? Maybe use words like ‘may charge’ ’’); Anonymous28 Feedback Form (‘‘The section on fees might better be presented in a chart—no mention is made of front and backend loads.’’). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 information would be helpful.419 Industry commenters, commenters representing investors, and commenters on Feedback Forms, and roundtable participants supported some disclosure regarding product-level fees, though commenters differed in the level of suggested detail on such fees.420 For instance, one commenter stated that the relationship summary should reveal all fees and commissions for all purchases.421 Other commenters, however, believed that a link to the prospectus should sufficiently satisfy disclosure requirements regarding mutual fund fees and expenses.422 Another urged the Commission to provide a list of examples of transaction-based fees.423 We agree that understanding these fees is important so that retail investors have the necessary information to evaluate between firms, firm types (i.e., investment adviser, brokerage, or dually registered), and firm services, accounts, and products so that they can select what is right for them. We continue to believe drawing retail investors’ attention to these additional fees is important because they have an impact on investors’ investment returns over time. Accordingly, we are requiring disclosure of these types of fees and listing examples of categories as proposed. The final instructions, however, make clear that firms can use their own wording, and only require examples of the most common fees and costs. As discussed below, firms will be 419 See RAND 2018, supra footnote 13 (qualitative interview results), Kleimann I, supra footnote 19; Kleimann II, supra footnote 19 (in study testing investor reaction to alternate design of relationship summary, participants continued to focus on additional fees and wanted additional information on fees); see also Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 5) (of 48 Feedback Forms with narrative comments suggesting additional information to be required in the relationship summary, 29 suggested that additional information about fees and costs would be helpful). 420 See Fidelity Letter; CFA Letter I; see also Anonymous11 Feedback Form (‘‘. . . disclose specific fees for different types of securities’’); Caddess Feedback Form (‘‘description of brokers buying one ‘loaded’ fund and then selling it soon after to buy a more ‘suitable loaded’ fund is not vivid enough.’’); Fontaine Feedback Form (‘‘More on the mutual fund loads and class shares Load’’); Malone Feedback Form (‘‘Suggest fees monthly associated with each fund by type’’); Mennella Feedback Form (‘‘In addition to paying a management fee what is the cost of the underlying investments such as mutual funds, liquid alternatives, seperately [sic] managed accounts, transaction costs, etc.?’’); Houston Roundtable; Philadelphia Roundtable. 421 Comment Letter of Tony Greiner (Jul. 14, 2018). 422 Comment Letter of Oppenheimer Funds (Aug. 7, 2018) (‘‘Oppenheimer Letter’’); TIAA Letter. 423 Comment Letter of the Investment Company Institute (Aug. 7, 2018) (‘‘ICI Letter’’). PO 00000 Frm 00211 Fmt 4701 Sfmt 4700 33527 required to include cross-references to more specific information, and will be permitted to use tools to help investors learn about these fees and costs in an interactive way without overwhelming retail investors with the additional information. We believe that this approach balances providing short, understandable disclosures about additional fees and costs with investors’ interest in understanding more about fees and costs. Additional Information. Finally, in a change from the proposal, firms will be required to state: ‘‘You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investment over time. Please make sure you understand what fees and costs you are paying.’’ 424 The first sentence replaces a statement in the proposal that some investments impose additional fees that will reduce the value of the retail investor’s investment over time. Given the importance of assisting investors to understand the impact of fees and costs, we are requiring prescribed wording in this instruction. The prescribed wording discloses to investors a key term under which a service will be offered, namely the fact that the service will not be free and that the cost of using the service will exist regardless of investment performance.425 Firms must also include specific cross-references to more detailed information about their fees and costs.426 The cross-reference must, at a minimum, include the same information as, or contain information equivalent to that required by, the Form ADV Part 2A brochure (specifically Items 5.A., B., C., and D.) and Regulation Best Interest, as applicable.427 If the firm is a brokerdealer that does not provide recommendations subject to Regulation Best Interest, to the extent it prepares more detailed information about its fees, it must include specific references to such information.428 The final instructions require firms to use text features to make this additional information more noticeable and prominent in relation to other discussion text.429 Firms may choose to 424 Item 3.A.(iii) of Form CRS. Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 651 (1985) (upholding required disclosure of factual information about terms of service, including that clients would still be liable to litigation costs even if their lawsuits were unsuccessful). 426 Item 3.A.(iii) of Form CRS. 427 Item 3.A.(iii) of Form CRS. 428 Item 3.A.(iii) of Form CRS. 429 General Instruction 4.C to Form CRS. For example, firms could use larger or different font; a 425 See E:\FR\FM\12JYR2.SGM Continued 12JYR2 33528 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 provide a hyperlink, or other means of facilitating access, that leads directly to the relevant Regulation Best Interest disclosure or section of Form ADV, or they may choose to create an additional page that contains the same or equivalent information.430 For example, a firm may decide to include information on a different website. The proposed instructions did not include a specific cross-reference to additional fee disclosure, but the proposal required a cross-reference in the Additional Information section about where the retail investor could find information about the services offered, and we requested comment on whether to require firms to include a fee schedule.431 In the RAND 2018 survey, a potential hyperlink to information on fees, however, generated the most interest among survey participants.432 Some industry commenters suggested that the relationship summary should permit hyperlinks to fee schedules, arguing that additional information would be helpful for retail investors, but that including the fee schedule itself would be unwieldy.433 Another commenter, however, suggested requiring a fee schedule that includes typical breakpoints and information on likely and/or maximum fees.434 Given the feedback from investors that fee information is important, we believe that requiring specific references to more detailed information about fees balances the goals of the relationship text box around the heading or questions; bolded, italicized, or underlined text; or lines to offset the information from other sections. 430 While drafting these disclosures for Form CRS, investment advisers also are encouraged to consider whether they can describe the information about fees more clearly in the Form ADV brochure in a more reader-friendly format. See also General Instructions 3. and 4. of Form CRS (instructions applicable to electronic delivery). For further discussion of these provisions, see supra Section II.A.3. and footnotes 156 and 158 and accompanying text, and Section II.B.2.(b) and footnotes 348–349. 431 Proposed Item 7.E. of Form CRS. 432 See RAND 2018, supra footnote 13 (58% of participants selecting ‘‘very likely’’ and another 32% selecting ‘‘somewhat likely’’ to click on a hyperlink relating to fees; no other potential hyperlink generated a majority with ‘‘very likely’’ usage among any investor or education subgroup). Other investor studies indicated that participants wanted descriptions of the hyperlinks to be more concrete in terms of what information they would find, and that, while some participants were interested in additional information, others admitted they would not follow the links because it was extra effort, they were uninterested, or the link did not itself suggest what would be there. See Kleimann II, supra footnote 19. In addition, numerous commenters supported layered disclosure. See supra footnote 31 and accompanying text. 433 See CFA Letter I; IAA Letter I; LPL Financial Letter. 434 See Morningstar Letter. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 summary, to highlight information covering several topics, with investors’ interest in understanding more about fees. This approach will give retail investors information about the types of fees at a higher level and then offer more details, permitting the relationship summary to cover other important topics as well.435 Including a fee schedule in the relationship summary could make it more difficult to also cover the other topics while maintaining short, digestible disclosures. Instead, we are not including a fee schedule in the relationship summary but are requiring cross references to balance providing a shorter document with giving retail investors easy access to more detailed information. Conversation Starter. We are also adopting a conversation starter that is designed to prompt a more personalized discussion regarding the fees and costs that will impact the particular retail investor’s account. A firm must include the following question for the retail investor to ask his or her financial professional: ‘‘Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?’’ 436 As discussed above, the proposal included the following ‘‘Key Question,’’ which was intended to serve as a conversation starter between the retail investor and the financial professional and to provide the investor an opportunity to receive a quantitative example of the impact of fees: ‘‘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?’’ 437 The Proposing Release discussed the option of including an example of the impact of fees in the relationship summary, and requested comment on whether we should require an example showing how sample fees and charges apply to a hypothetical advisory account and a hypothetical brokerage account, as applicable.438 We also requested comment on what assumptions firms should make in preparing such an example and how the information should be presented.439 Feedback from the RAND 2018 report, other surveys and studies, roundtables, and the Feedback Forms showed that PO 00000 435 See supra Section II.A.3. 3.A.(iv) of Form CRS. 437 Proposed Item 8 of Form CRS. 438 Proposing Release, supra footnote 5. 439 Proposing Release, supra footnote 5. 436 Item Frm 00212 Fmt 4701 Sfmt 4700 retail investors want more information about fees and the impact of those fees on their investments.440 At some of the roundtables, for example, participants discussed the utility of adding a hypothetical example in the relationship summary to illustrate fees.441 Commenters on Feedback Forms also asked for more specific information about the impact of fees on their investments, such as example fee calculations or ranges of fees.442 Commenters supported including a question highlighting fees a retail investor pays.443 Commenters, including commenters representing investors and individual investors, also overwhelmingly supported requiring 440 See e.g., RAND 2018, supra footnote 13 (noting survey results finding that the fees and costs section was ‘‘the section for which the largest share of respondents suggest adding more detail’’ and investors were more likely than non-investors to suggest adding more detail to the section on fees and costs (31 percent versus 25 percent), and in qualitative interviews, ‘‘participants expressed that this section is overwhelming . . . and at the same time felt more information would be helpful.’’); Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 5) (narrative answers on 29 Feedback Forms indicated that additional information about fees and costs would be helpful). 441 See Washington, DC Roundtable (an investor stated that it would be useful for comparing understanding costs if hypothetical examples were given about how cost affects the investor’s returns); Atlanta Roundtable (an investor stated that it would be helpful to know the cost of investing a hypothetical amount of money); and Philadelphia Roundtable (an investor stated that it would be helpful to see hypothetical broker and investment adviser fee arrangements for a given investment portfolio to aid in determining which arrangement may be more appropriate for the investor). 442 See, e.g., Lee1 Feedback Form (‘‘fees should tell me the fees I can expect to pay’’); Anonymous03 Feedback Form (‘‘Create a calculator . . . where the investor fills in the amount and the fees for both scenarios are calculated’’); Anonymous06 Feedback Form (‘‘Provide monetary examples. If you invest $100, then your fees are . . .’’); Anonymous24 Feedback Form (requesting ‘‘more specific examples showing specific costs’’); Baker Feedback Form (‘‘Graphic and hypothetical examples could be helpful. Mary invests $50,000 with a brokerdealer and Jane invests $50,000 with an investment adviser and present some scenarios with each . . . As fees, commissions, etc. may vary and be negotiable, a range of typical, usual, main-stream commission charges and asset-based fees would be helpful to alert the client to possible overcharges.’’); Bhupalam Feedback Form (‘‘What would make it better is if it has samples of costs in particular with each firm a client is dealing with.’’); Hawkins Feedback Form (‘‘Including some ranges as to what to expect in fees could help. Also, including information as to the impact that increased fees have on investment returns, long term, would help the average investor.’’); Mennella Feedback Form (‘‘I want to know what an investment is going to cost me over my time horizon . . . .’’). 443 See IAA Letter I; LPL Financial Letter; New York Life Letter; Primerica Letter; RAND 2018, supra footnote 13 (91% of participants indicated they were ‘‘very likely’’ or ‘‘somewhat likely’’ to ask a supplemental question that addressed the amount of a $1,000 investment that would go to fees and costs rather than being invested for them). E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 more information to help retail investors understand the fees and costs associated with their investments, particularly specific examples about how those fees could affect them.444 Several commenters, however, objected to the inclusion of the key question addressed above because of the operational challenges present in answering such a question with respect to a particular retail investor.445 Some argued that anticipated fees are unknown for brokerdealer customers, while others believed that it is too difficult for firms to build out systems for individualized fees.446 Other commenters suggested eliminating this particular key question and instead requiring firms to include links to investor education materials prepared by the Commission.447 Many commenters were concerned that this key question would impose new disclosure or recordkeeping requirements.448 Commenters that supported more fee disclosure had a range of suggestions as to how to include the additional information. For example, one commenter believed that if hypothetical or personal fee disclosures are included in the relationship summary, such disclosures should focus on helping investors understand the effect expenses have on an investment and should make clear that such an example is for educational purposes.449 One individual advocated for more transparent fee information, suggesting the relationship summary provide individualized fees or a specific range of fees.450 Another 444 See, e.g., CFA Institute Letter I; CFA Letter I; Betterment Letter I; Morningstar Letter; John Hancock Letter; Comment Letter of Barbara Greenwald (Jul. 12, 2018). See, e.g., Anonymous25 Feedback Form (‘‘give examples with numbers, showing examples of hypothetical accounts’’); Baker Feedback Form (‘‘Graphic and hypothetical examples would be helpful’’); Coleman Feedback Form (‘‘Need simple examples’’); Manella Feedback Form (‘‘I want to know what an investment is going to cost me over my time horizon’’); Schreiner Feedback Form (‘‘Provide a hypothetical example with industry standard fees . . .’’); see also Atlanta Roundtable; Houston Roundtable; Washington, DC Roundtable. 445 See supra footnote 189. 446 See NSCP Letter; Edward Jones Letter (noting that given the range of services available, it would be very difficult for financial professionals to fully address this question at the outset of the relationship, particularly for investors selecting transaction-based services); TIAA Letter; LPL Financial Letter; Primerica Letter; ICI Letter; SIFMA Letter (noting most firms do not currently have systems in place to allow financial professionals to answer customer-specific questions). 447 See Prudential Letter. 448 See Edward Jones Letter; see also supra Section II.A.4. 449 See Invesco Letter (stating that this could be achieved by, for example, a side-by-side bar graph showing the growth of an investment gross of costs and net of costs). 450 See Wahh Letter. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 commenter noted that, in response to a previously commissioned report revealing participants’ lack of knowledge about fees as well as their desire for a better understanding of fees, a general chart or graph that depicts the effects of fees on an account would be helpful for investors.451 Another commenter included a sample mock relationship summary with a numerical example of how the fees might impact a hypothetical account.452 Given the importance of fees, we want to encourage retail investors and their financial professionals to have a conversation to further discuss the particular fees and costs that would apply to the retail investor, and the impact fees and costs could have on the retail investor’s investment returns over time, in order to promote investor understanding. After consideration of the comments received, we are adopting a conversation starter that is designed to elicit a more personalized discussion regarding the fees and costs that will impact the particular retail investor’s account, while mitigating the concerns regarding the proposed ‘‘Do the math for me’’ question posed.453 We believe that this conversation starter will allow financial professionals to tailor the conversation to the particular retail investor even if the financial professional does not provide precise fee information for that individual during the conversation. For instance, if the financial professional intends to recommend mutual funds to the retail investor, he or she may choose to discuss firm- and product-level fees that may apply. The financial professional should be in a position to explain the fees and costs relevant to that particular retail investor if the investor chooses a certain type of account and certain investment, even if the financial professional provides examples and estimated ranges rather than a precise prediction of how much the investor will pay. In addition, the financial professional should explain how those fees and costs will work (for example, whether they are upfront charges, taken out of the initial investment amount, taken out over time, future charges, or charged in another manner) and how the fees and costs could impact the retail investor’s investment returns over time. Firms may consider including calculators, charts, graphs, tables, or AARP Letter. Betterment Letter I (Hotspex), supra footnote 18 (noting that investors who viewed a redesigned version of the standalone adviser relationship summary appeared to appreciate the example of how fees would impact a hypothetical account). 453 See supra Section II.A.4. PO 00000 451 See 452 See Frm 00213 Fmt 4701 Sfmt 4700 33529 other graphics or text features to enhance an investor’s understanding of these fees. Firms may also consider reviewing with their retail investors the impact of fees on the retail investor’s account on a periodic basis.454 While we agree that examples are important to illustrate the potential impact of fees, we decline to require firms to provide a hypothetical example in the relationship summary.455 Our intent with the proposed ‘‘Do the math for me’’ question was that it serve as a conversation starter and a prompt to encourage the retail investor to ask about the amount she would typically pay per year for the account, what would make the fees more or less, and what was included in those fees.456 We believe that the conversation starter that is being adopted here is consistent with the proposal’s intent to prompt retail investors to have a conversation with their financial professional about fees that may impact their investments and account while also addressing the concerns raised by commenters. We encourage firms to consider ways to provide more personalized disclosures to retail investors, and we will continue to consider whether to require more personalized fee disclosure, particularly as operational and technological costs fall. b. Other Ways of Making Money, Standard of Conduct, and Conflicts of Interest Firms will be required to include disclosure under a single heading describing their standard of conduct and a summary of certain firm-level conflicts, including the specific conflicts the proposal required.457 The proposal required disclosure on both conflicts and the standard of conduct, but in separate sections. The final relationship summary requires discussion in one section of other firmlevel revenues and conflicts of interest, 454 See Regulation Best Interest Release, supra footnote 47, at Section II.C.1.a. 455 See infra Section IV.D.4 (Alternatives to the Relationship Summary) for a discussion on the inclusion of a hypothetical fee example. 456 Proposing Release, supra footnote 5. 457 Item 3.B. of Form CRS. For broker-dealers, the heading will state ‘‘What are your legal obligations to me when providing recommendations? How else does your firm make money and what conflicts of interest do you have?’’; for investment advisers, the heading will state ‘‘What are your legal obligations to me when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?’’; and for dual registrants that prepare a single relationship summary, the heading will state ‘‘What are your legal obligations to me when providing recommendations as my broker-dealer or when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?’’. E:\FR\FM\12JYR2.SGM 12JYR2 33530 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations and the applicable standard of conduct.458 We are placing these disclosures together, including the related conversation starter, because we believe they will more effectively allow retail investors to understand the standards of conduct for broker-dealers and investment advisers.459 We are also modifying the requirements for the standard of conduct and conflict of interest disclosures, as discussed in more detail below. We continue to believe it is important to highlight the presence of conflicts and their interconnectedness with how the firm makes money. We recognize that investment advisers, broker-dealers, and their financial professionals have conflicts that affect their retail investor clients and customers and believe it is important to underscore this for retail investors.460 Similarly, we continue to believe that it is important to provide retail investors with disclosure regarding a broker-dealer or investment adviser’s legal obligations regarding the required standard of conduct in a way that is understandable for retail investors. Standard of Conduct. As proposed, we are adopting a requirement that firms describe their legal standard of conduct using prescribed wording (the ‘‘standard of conduct disclosure’’).461 In 458 Id. jbell on DSK3GLQ082PROD with RULES2 459 In addition, retail investors may learn more about investment advisers, broker-dealers, and investing at Investor.gov/CRS, which will be referenced in a relationship summary’s introduction. See Instruction to Item 1.B. of Form CRS. 460 See infra footnote 495 and accompanying text. 461 Under the proposal, broker-dealers that offer brokerage accounts to retail investors would have been required to include the following: ‘‘[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.’’ The bracketed wording would have been included only if the broker-dealer offered recommendations subject to Exchange Act Rule 15l–1. See Proposed Item 3.B.(1) of Form CRS. In addition, such broker-dealers would have had to include the following: ‘‘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].’’ The bracketed wording would only have been included if the broker-dealer offered recommendations subject to Regulation Best Interest. See Proposed Item 3.B.(2) of Form CRS. Under the proposal, investment advisers that offer investment advisory accounts to retail investors would have had to include the following: ‘‘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.]’’ The bracketed wording would have been omitted if the investment adviser did not VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 a change from the proposal, however, the final instructions modify both the content of the standard of conduct disclosure 462 and its placement in the relationship summary. As discussed in more detail below, the final instructions require broker-dealers, investment advisers, and dual registrants to include a brief statement of the applicable standard of conduct.463 In addition, as discussed above, this disclosure is required to be included in the conflicts of interest section rather than a separate standard of conduct section. Most commenters did not object to the proposal’s requirement that brokerdealers and investment advisers provide disclosure regarding their standards of conduct or that such disclosure be standardized.464 Results of the RAND 2018 report and other investor studies and surveys indicate that retail investors view this information as helpful.465 Similarly, commenters on Feedback Forms indicated that this information was useful.466 In addition, the IAC recommended that investors would benefit from receiving uniform, plainEnglish disclosure documents with topics, such as, to the extent the Commission does not adopt a uniform fiduciary standard, ‘‘what is your legal obligation to me?’’ 467 Certain commenters, however, suggested that the Commission discuss generally provide ongoing advice. See Proposed Item 3.C.(1) of Form CRS. In addition, such investment advisers would have had to include the following: ‘‘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.’’ See Proposed Item 3.C.(2) of Form CRS. The section also required a statement that the firm’s interests may conflict with a retail investor’s interests and explain the firm’s obligations with respect to those conflicts using prescribed wording. See Proposed Item 3 of Form CRS. 462 Form CRS also includes a conversation starter regarding broker-dealers and investment advisers’ standards of conduct. See infra footnote 495 and accompanying text. 463 Item 3.B.(i) of Form CRS. 464 See, e.g., AARP Letter; CFA Institute Letter I; IAA Letter II. 465 See RAND 2018, supra footnote 13 (almost one third of survey respondents selected this section as one of the two most useful; almost 60% would keep the length as is and over 15% would add detail); Cetera Letter II (Woelfel), supra footnote 17 (88% of survey respondents somewhat or strongly agreed ‘‘the firm’s obligations to you’’ is a ‘‘very or somewhat important’’ topic); see also Schwab Letter I (Koski), supra footnote 21 (‘‘obligations of the firm’’ ranked third where survey participants were asked to identify four topics as most important for a firm to communicate’’). 466 Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 2(b)) (36 commenters (39%) graded the ‘‘Our Obligations to You’’ section of the relationship summary as ‘‘very useful’’ and 42 commenters (45%) graded this section as ‘‘useful’’). 467 IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10. PO 00000 Frm 00214 Fmt 4701 Sfmt 4700 applicable information, including standards of conduct, in investor educational materials instead of requiring firms to do so in their relationship summaries.468 A number of these commenters argued that this wording might unintentionally create an implied contractual relationship subject to a customer’s private right of action.469 The prescribed language describing the standard of conduct broker-dealers and investment advisers owe to their customers and clients is not intended to create a private right of action. Many commenters, however, found that the specific wording we proposed 470 did not effectively address investor confusion concerning legal duties applicable to broker-dealers and investment advisers. Commenters indicated that the proposed wording in this section was confusing and did not clarify the applicable legal standards.471 Some commenters argued that this section included legal jargon inaccessible to retail investors.472 Others believed that retail investors are unlikely to understand the difference between ‘‘best interest’’ and ‘‘fiduciary,’’ with some suggesting that relationship summaries more clearly define the applicable legal standards or communicate the differences between ‘‘fiduciary’’ and ‘‘best interest.’’ 473 Investment advisers also expressed concern that retail investors may ‘‘wrongly’’ view ‘‘best interest’’ as a higher standard of conduct as compared to the fiduciary standard.474 Investor feedback through surveys and studies and in comments at roundtables and on Feedback Forms also showed some confusion. For example, some participants in investor studies and at one of the roundtables did not understand why conflicts of interest existed if broker-dealers and investment advisers were held to the standards of conduct described.475 Investor studies and surveys showed 468 See, e.g., Primerica Letter. ASA Letter; Primerica Letter; Transamerica Letter (requesting a statement from the Commission that any such private right of action was not intended). 470 See supra footnote 461. 471 See, e.g., AARP Letter; Betterment Letter I; CFA Letter I. 472 See Comment Letter of Fisher Investments (Jul. 31, 2018) (‘‘Fisher Letter’’); see also Kleimann I, supra footnote 19; RAND 2018, supra footnote 13; Kleimann II, supra footnote 19. 473 See, e.g., AARP Letter; CFA Letter I; Comment Letter of the Financial Planning Coalition (Aug. 7, 2018) (‘‘Financial Planning Coalition Letter’’). 474 See, e.g., Betterment Letter I; Fisher Letter; IAA Letter I; IAA Letter II. 475 See RAND 2018, supra footnote 13 (in qualitative interviews, participants felt that the conflicts of interest section contradicted the ‘‘Our Obligations to You’’ section); Miami Roundtable. 469 See E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 that participants varied in their understanding of differing obligations for different account types, some viewing brokerage accounts and advisory accounts as subject to similar standards of conduct but others interpreting the section as conveying that the two account types are subject to different standards.476 Observations reported by the RAND 2018 report, other surveys and studies and comments received on Feedback Forms demonstrated that many participants did not understand the meaning of the word ‘‘fiduciary’’ in particular.477 Investor studies also further observed that, when presented with alternative mock-ups of a relationship summary designed to clarify this section, some investors still struggled with understanding the legal obligations of brokers and advisers.478 We proposed this section to address investor confusion concerning legal duties applicable to broker-dealers and investment advisers and, in combination with the key questions about the financial professional’s legal obligations, to encourage a conversation between the retail investor and the financial professional about applicable standards of conduct.479 The prescribed wording was intended to promote 476 See RAND 2018, supra footnote 13; see also Kleimann I, supra footnote 19 (‘‘Most participants did not draw a parallel between the ‘best interest standard’ of the Broker-Dealers and the ‘fiduciary standard’ of Investment Advisers. Rather, they drew a parallel between ‘specific obligations’ with Broker-Dealers and ‘fiduciary standards’ with Investment Advisers . . . [and] saw these two as similar regulatory obligations.’’); Betterment Letter I (Hotspex), supra footnote 18 (in a survey that tested participant’s comprehension after viewing a version of the proposed sample standalone adviser relationship summary, only 26% correctly identified as false a statement that broker-dealers are held to a fiduciary standard; 71% correctly identified as true that an adviser (Betterment) would be held to a fiduciary standard). 477 See, e.g., RAND 2018, supra footnote 13 (‘‘Some participants had never heard of the word, whereas others had heard it but did not know what it meant in this context. Others thought the word ‘‘fiduciary implies acting in best interest . . .’’); Kleimann I, supra footnote 19 (‘‘Few participants could define ‘fiduciary standard’ ’’); see also Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 4) (On 10 Feedback Forms, commenters specifically asked for a definition or better explanation of the term ‘‘fiduciary.’’). 478 See, e.g., Kleimann II, supra footnote 19 (explains that, after redesign of obligations section participants still struggled to understand the implications of the fiduciary standard for advisers compared to the best interest standard for brokerdealers); Betterment Letter I (Hotspex), supra footnote 20 (almost one half of survey participants reviewing a version of the standalone adviser relationship summary designed by Betterment did not correctly identify as false a statement that broker-dealers are held to a fiduciary standard). 479 See Proposing Release, supra footnote 5, at n.114 and accompanying text. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 consistency in communicating these standards to retail investors.480 We continue to believe that it is appropriate for the final instructions to require broker-dealers and investment advisers to describe their standards of conduct to investors, because, as discussed above, we believe that it is important to promote retail investors’ understanding of these obligations. We also agree with commenters that requiring these firms to include prescribed disclosure regarding these standards of conduct is important in achieving this goal.481 While the final instructions generally do not require prescribed disclosure in other contexts,482 we believe that investors should be provided with a consistent articulation of their firm’s legal obligations regarding their standard of conduct and that the rationale for allowing firms flexibility to tailor their disclosure in other aspects of the relationship summary does not apply with respect to the standard of conduct. In this regard, some commenters stated that Form CRS should be an educational document, which would be a standardized document published and maintained by the Commission.483 While the content of disclosure regarding a firm’s standard of conduct should be uniform, this disclosure should appear in the relationship summary, which must be delivered to all retail investors, rather than a separate SEC-staff-created and maintained publication. In addition, prescribing language for this disclosure does not raise the same concerns that commenters raised about prescribed language generally. For example, we are permitting more flexibility in how firms describe their fees and services in response to comments that some of the prescribed wording, for example, was not necessarily applicable to their business and could make investors confused.484 By contrast, a legal standard of conduct, whether through an investment adviser’s fiduciary duty, Regulation Best Interest, or both, will 480 Proposing Release, supra footnote 5, at n.115 and accompanying text. 481 But see footnotes 468–469 and accompanying text. 482 As discussed in more detail above, many commenters who believed that the final instructions should not require prescribed disclosure focused on other aspects of the relationship summary, such as disclosure regarding a description of a firm’s services. See supra Section II.A.1. 483 See, e.g., Primerica Letter. 484 See supra Section II.A.1. One commenter noted that requiring prescribed disclosure in some circumstances may not be accurate for all business models and could mislead investors. See CFA Letter I. PO 00000 Frm 00215 Fmt 4701 Sfmt 4700 33531 apply to all firms delivering the relationship summary that provide recommendations or investment advice, and prescribing language will avoid investor confusion when describing the applicable standard. Indeed, it may be confusing to investors comparing relationship summaries among prospective firms to see the same legal standard described differently among these firms. The required statements about the legal standard of conduct are disclosures of purely factual information about the terms under which the firms’ services will be made available to investors.485 We have determined, however, that the proposed standard of conduct disclosure may not have appropriately addressed investor confusion. While the proposal was intended to provide retail investors with simple, easily understood disclosure, we agree with commenters and results from investor studies and surveys,486 that the relationship summary could be revised in a manner that would be more beneficial to retail investors,487 especially in light of the similarity between broker-dealers’ and investment advisers’ legal obligations to retail investors with respect to their standards of conduct when providing recommendations or advice under the rules and interpretations we are adopting concurrently.488 In this regard, we have modified the standard of conduct disclosure to include it within the conflicts of interest section of the relationship summary and to contain simplified wording that is short, plain language, and user-friendly but still describes the key components of a broker-dealer’s or investment adviser’s standard of conduct when providing recommendations or advice.489 First, we are modifying the standard of conduct disclosure so that it is required to be provided under a modified heading 490 in the conflicts of 485 See Zauderer, 471 U.S. at 651; Milavetz, 559 U.S. at 250. 486 See supra Section II.A. 487 See, e.g., AARP Letter. 488 See Fiduciary Release, supra footnote 47; Regulation Best Interest Release, supra footnote 47. 489 The final instructions provide that if a required disclosure or conversation starter is inapplicable or specific wording required by the instructions is inaccurate, firms may omit or modify that disclosure or conversation starter. See General Instruction 2.B. to Form CRS. We note that, like the proposal, the standard of conduct disclosure distinguishes between broker-dealers that provide recommendations subject to Regulation Best Interest and broker-dealers that do not provide recommendations subject to Regulation Best Interest. See infra footnote 507 and accompanying text. 490 Item 3.B. of Form CRS; see also supra footnote 457. E:\FR\FM\12JYR2.SGM 12JYR2 33532 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations interest section.491 While brokerdealers’ and investment advisers’ legal obligations regarding their standard of conduct apply not just in the context of conflicts of interest,492 we believe that requiring this disclosure to be included in the conflicts of interest section will provide a retail investor with a greater ability to discern how a particular legal obligation regarding a standard of conduct may affect him or her by describing the application of that obligation in the context of conflicts of interest, which was a primary concern for retail investors and commenters alike.493 In addition, this placement is supported by observations reported in the RAND 2018 qualitative interviews and another study, which indicated that some participants struggled with how to reconcile the conflicts of interest section with the legal obligations section because they were discussed separately.494 Second, in the conversation starter relating to this section, we are requiring firms to include the following question: ‘‘How might your conflicts of interest affect me, and how will you address them?’’ 495 As discussed above, we believe that including questions for investors to ask their financial professionals is an important component of the relationship summary. This question also underscores for retail investors that investment advisers and broker-dealers have conflicts that may create incentives to put their interests ahead of the interests of their retail clients and customers.496 As a corollary, it also underscores for retail investors how investment advisers and broker-dealers address these conflicts of interest in discharging their legal obligations regarding their standards of conduct to these investors. We believe that this requirement will improve a retail investor’s understanding of the standard of conduct owed by his or her financial professional by helping the investor to better understand its application to him or her. Unlike the proposal,497 the final instructions do not require prescribed disclosure summarizing how a firm’s standard of conduct would require it to address conflicts of interest. As discussed above, commenters found the proposal’s standard of conduct disclosure confusing.498 After considering comments and observations reported in surveys and studies, we recognize that the proposed disclosures were confusing, particularly the prescribed disclosure attempting to explain concepts of full and fair disclosure, mitigation, and informed consent.499 Accordingly, we are removing this wording to shorten the disclosure and to provide more focus on the rest of the disclosure required in this section, as we believe this should improve investor comprehension. We believe that clearly disclosing to investors that firms have an obligation to act in the best interest of a client or customer and also simultaneously have conflicts of interest is more important than describing the particular aspects of firms’ general duty to disclose, mitigate, or obtain informed consent to conflicts, as applicable. Instead of this disclosure, we are requiring a conversation starter to encourage firms to discuss with retail investors how their standards of conduct require them to address conflicts of interests. In addition, we believe that the discussion prompted by the conversation starter accompanied by examples of conflicts of interest 500 will provide retail investors with specific illustrations of how a firm’s standard of conduct can apply, which could encourage investors to ask more detailed questions about how firms address their conflicts. Finally, we have modified the standard of conduct disclosure for broker-dealers and investment advisers to reduce the amount of required disclosure,501 to focus the disclosure on the standard of conduct that applies to the provision of recommendations and 497 See Proposed Items 3.B.2. and 3.C.2. of Form advice,502 and to require that portions of the disclosure be presented in bold and italicized font.503 We believe that streamlining the standard of conduct disclosure and tailoring the disclosure to the type of firm providing such disclosure will clarify for retail investors the applicable legal standard of conduct to which their particular firm is subject when providing recommendations or advice or when providing broker-dealer services without recommendations. Most commenters found the proposal’s standard of conduct disclosure confusing because it included legal or technical words. For example, some commenters, and results from investor studies and surveys, indicated that many did not understand the meaning of ‘‘fiduciary’’ or had never heard of the word.504 Accordingly, the modified standard of conduct disclosure both eliminates technical words, such as ‘‘fiduciary,’’ and describes the standards of conduct of broker-dealers, investment advisers, or dual registrants using similar terminology in a plain-English manner. In particular, the final instructions use the term ‘‘best interest’’ to describe how broker-dealers, investment advisers, and dual registrants must act regarding their retail customers or clients when providing recommendations as a broker-dealer or acting as an investment adviser.505 We believe that requiring firms—whether broker-dealers, investment advisers, or dual registrants—to use the term ‘‘best interest’’ to describe their applicable standard of conduct will clarify for retail investors their firm’s legal obligation in this respect, regardless of whether that obligation arises from Regulation Best Interest or an investment adviser’s fiduciary duty under the Investment Advisers Act.506 The modified language, however, highlights a key difference in when a firm must exercise its obligation— specifically, when providing a recommendation (in the case of a broker-dealer),507 or when acting as an CRS. 491 Item 3 of Form CRS. Regulation Best Interest Release, supra footnote 47 and Fiduciary Release, supra footnote 47. 493 See Proposing Release, supra footnote 5, at Section II.B.6; supra footnote 475 and accompanying text. 494 See, e.g., RAND 2018, supra footnote 13 (noting that ‘‘[s]ome participants expressed appreciation that the firm was being transparent about its conflicts of interest, but many participants struggled with how to reconcile the information in this section with the previous ‘Our Obligations to You’ section.’’); Kleimann I, supra footnote 19; see also infra footnote 505 and accompanying text. 495 Item 3.B.(iii) of Form CRS. 496 See supra Section II.A.4. jbell on DSK3GLQ082PROD with RULES2 492 See VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 498 See supra footnote 471 and accompanying text. See also RAND 2018, supra footnote 13 (noting that one ‘‘participant pointed out that the obligations section had said that any conflicts of interest would be reduced and disclosed [but] the conflicts of interest section does not mention disclosing or reducing conflicts); Kleimann II, supra footnote 19 (‘‘Most participants did not understand how conflicts would be resolved . . . they read the disclosure as indicating that Brokerage Accounts were under no obligation to notify clients of a conflict . . .’’). 499 See Fiduciary Release, supra footnote 47 (discussing the concepts of full and fair disclosure, mitigation, and informed consent). 500 Item 3.B.(ii) of Form CRS. 501 Items 3.B.(i).a. and 3.B.(i).b. of Form CRS. PO 00000 Frm 00216 Fmt 4701 Sfmt 4700 502 Item 3.B. of Form CRS (heading). 3.B.(i).a., 3.B.(i).b., and 3.B.(i).c. of Form 503 Items CRS. 504 See supra footnote 477 and accompanying text; see also CFA Letter I (citing to ‘‘man on the street’’ interviews suggesting that average investors do not understand the term ‘‘fiduciary’’); Consumer Reports Letter (commenting on the RAND 2018 report). 505 Item 3.B.(i) of Form CRS. 506 See Fiduciary Release, supra footnote 47; Regulation Best Interest Release, supra footnote 47. 507 Item 3.B.(i).a. of Form CRS (requiring brokerdealers that provide recommendations subject to Regulation Best Interest to include (emphasis required): ‘‘When we provide you with a recommendation, we have to act in your best E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 investment adviser,508 or either providing a recommendation or acting as an investment adviser (in the case of a dual registrant).509 Portions of the modified standard of conduct disclosure also are required to be presented in bold and italicized font.510 The final instructions are designed to provide retail investors with a clear understanding of when a firm’s legal obligations regarding its standard of conduct is required to be discharged. In addition, with respect to broker-dealers, the modified standard of conduct disclosure, like the proposal,511 distinguishes between broker-dealers interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the recommendations we provide you. Here are some examples to help you understand what this means,’’ and broker-dealers that do not provide recommendations subject to Regulation Best Interest to include (emphasis required): ‘‘We do not provide recommendations. The way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the services we provide you. Here are some examples to help you understand what this means.’’). 508 Item 3.B.(i).b. of Form CRS (requiring investment advisers to include (emphasis required): ‘‘When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the investment advice we provide you. Here are some examples to help you understand what this means.’’). 509 Item 3.B.(i).c. of Form CRS (requiring dual registrants that prepare a single relationship summary and provide recommendations subject to Regulation Best Interest to include (emphasis required): ‘‘When we provide you with a recommendation as your broker-dealer or act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the recommendations and investment advice we provide you. Here are some examples to help you understand what this means,’’ and dual registrants that prepare a single relationship summary and do not provide recommendations subject to Regulation Best Interest to include (emphasis required): ‘‘We do not provide recommendations as your broker-dealer. When we act as your investment adviser, we have to act in your best interest and not put our interests ahead of yours. At the same time, the way we make money creates some conflicts with your interest. You should understand and ask us about these conflicts because they can affect the services and investment advice we provide you. Here are some examples to help you understand what this means.’’ Also requiring that dual registrants that prepare two separate relationship summaries follow the instructions for broker-dealers and investment advisers in Items 3.B., 3.B.(i).a. and 3.B.(i).b.). 510 Items 3.B.(i).a. (‘‘When we provide you with a recommendation’’ and ‘‘do not’’), 3.B.(i).b. (‘‘When we act as your investment adviser’’), and 3.B.(i).c. (‘‘When we provide you with a recommendation as your broker-dealer or act as your investment adviser,’’ ‘‘do not,’’ and ‘‘When we act as your investment adviser’’) of Form CRS. 511 See Proposed Item 3.B. of Form CRS. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 that provide recommendations subject to Regulation Best Interest and brokerdealers that do not provide recommendations subject to Regulation Best Interest (e.g., execution-only brokers). The modified standard of conduct disclosure also requires that broker-dealers, investment advisers, and dual registrants to state that conflicts of interest will remain despite the existence of these legal obligations, and to provide examples of these conflicts.512 This change is designed to address commenters’ concerns that we clarify for retail investors the interaction between broker-dealers’ or investment advisers’ legal obligations regarding their standards of conduct and their conflicts of interest. Examples of Ways the Firm Makes Money and Conflicts of Interest. Following the standard of conduct prescribed wording, a firm must summarize the following ways in which it and its affiliates make money from brokerage or investment advisory services and investments it provides to retail investors, to the extent they are applicable to the firm.513 The specific wording is not prescribed, but firms must include specific information to describe each of the applicable conflicts. • Proprietary Products: Investments that are issued, sponsored, or managed by you or your affiliates; • Third-Party Payments: Compensation received from third parties when a firm recommends or sells certain investments; • Revenue Sharing: Investments where 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; and • Principal Trading: Investments the firm buys from a retail investor, and/or investments the firm sells to a retail investor, for or from the firm’s own accounts, respectively.514 If none of those conflicts apply to the firm, it must summarize at least one of its material conflicts of interest that affect retail investors. Firms will be required to explain the incentives created by each of these examples.515 The proposal would have required a firm to discuss these same enumerated 512 Broker-dealers that do not provide recommendations subject to Regulation Best Interest will be required to include substantially the same conflict disclosure, except that it will reflect that conflicts of interest can affect the services provided, rather than referring to recommendations. See Items 3.B.(i).a. and 3.B.i.(c) of Form CRS. 513 Item 3.B.(iv) of Form CRS. 514 Items 3.B.(iv)(a) through 3.B.(iv)(d) of Form CRS. 515 Item 3.B.(iv) of Form CRS. PO 00000 Frm 00217 Fmt 4701 Sfmt 4700 33533 topics, to the extent they were relevant. If none of the four specified conflicts applied to a firm, the firm was not required to discuss any other conflicts that applied to its business. The proposal did not require a firm to summarize other ways its affiliates made money from the services and products the firm provides to retail investors. We are adopting a heading that specifically asks how else the firm makes money in an effort to further highlight the firm’s financial incentives and emphasize that they are intertwined with conflicts. In a departure from the proposal, the relationship summary will not include an introductory sentence explaining that the firm benefits from the services it provides to the retail investor because we believe that the new heading and required content of this item make this sentence unnecessary. We are also expanding the required conflicts disclosures to ensure that firms without any of the enumerated conflicts will still summarize at least one other material conflict of interest. Firms will include the four enumerated conflicts (if applicable) that were in the proposal, or otherwise at least one material conflict of interest, and a specific cross-reference to more detailed information about conflicts. Firms with none of the enumerated conflicts should carefully consider their operations in their entirety when selecting a material conflict to disclose to retail investors. While we think it is unlikely that a firm will not have any material conflicts to disclose, if this item is inapplicable, firms may omit or modify this disclosure.516 Commenters generally believed that at least some conflicts disclosure was important to include in the relationship summary, but many suggested changes to the approach, including fewer conflicts disclosures and increased use of layered disclosure.517 Commenters generally supported requiring firms to disclose the types of conflicts of interest related to these financial incentives identified in the proposal, specifically disclosure regarding proprietary products,518 compensation received 516 General Instruction 2.B. of Form CRS. e.g., IAA Letter I (suggesting leveraging disclosures made elsewhere on Part 2 of Form ADV); SIFMA Letter (suggesting leveraging disclosures that would be required by Regulation Best Interest); Fidelity Letter and Schwab Letter I (suggesting using examples of conflicts, with links to additional disclosure). 518 See Fidelity Letter; Schwab Letter I; SIFMA Letter. 517 See, E:\FR\FM\12JYR2.SGM 12JYR2 33534 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 from third parties,519 revenue sharing,520 and principal trading.521 Investor feedback, however, was mixed. Results from the RAND 2018 survey and another survey indicated that many survey participants did not find this section to be as informative as other sections,522 and some participants in surveys and studies indicated that this section was ‘‘difficult’’ or ‘‘very difficult’’ to understand.523 About 75% of Feedback Form commenters rated the conflicts of interest section as either ‘‘very useful’’ or ‘‘useful,’’ while narrative comments on the Feedback Forms suggested that the conflicts of interest disclosure could be clarified or otherwise improved.524 Several commenters suggested that we broaden the disclosures to require a firm to inform its retail investors of all of the conflicts related to its business.525 519 See, e.g., IFS Letter; IAA Letter I; Wells Fargo Letter; Primerica Letter (suggesting including in additional layered disclosure). 520 See Fidelity Letter (third-party revenue sharing agreements in mock-up). 521 See mock-ups in IAA Letter I; Primerica Letter; Wells Fargo Letter. 522 See RAND 2018, supra footnote 13 (conflicts of interest was selected as one of the two most informative sections by only 15% of survey respondents and selected as one of the two least informative by 36%); Cetera Letter II (Woelfel), supra footnote 17 (81% of survey respondents strongly or somewhat agreed that conflicts of interest is an important topic in the relationship summary, fewer than for any other topic); see also Margolis Feedback Form (stating that the conflicts of interest section is very confusing, particularly with respect to fee-sharing arrangements and referral fees). 523 See RAND 2018, supra footnote 13 (about one third of survey respondents found this section to be difficult or very difficult to understand; in qualitative interviews, participants demonstrated misunderstanding of how this section reconciled with the ‘‘obligations to you’’ section and how conflicts would be resolved); Kleimann I, supra footnote 19 (interview participants had difficulty explaining how firms earned money from financial relationships that could cause conflicts and were unclear how conflicts would be resolved); Betterment Letter I (Hotspex), supra footnote 18 (noting that further improvements could be made to improve respondents understanding of differences in conflicts). 524 Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 2(e) and Question 4). Among the 41 Feedback Forms with narrative comments suggesting that one or more topics were too technical or could be improved, 14 included a narrative comment suggesting clarification or more information about conflicts of interest. See, e.g., Baker Feedback Form (‘‘A sampling of possible conflict-of-interest situations is most desirable’’); Bhupalam Feedback Form (‘‘It doesn’t clearly tell me whether the company will do this or not. In fact, it tells me that the company may do this and I should be fine with it.’’); Lee2 Feedback Form (‘‘What can I expect and not expect about the independence and conflict-free nature of the advice’’); Margolis Feedback Form (‘‘While I agree that fee-sharing arrangements and referral fees need to be disclosed, your wording is confusing’’); Schreiner Feedback Form (‘‘highlight implications of conflicts of interest’’). 525 See CFA Institute Letter I; Trailhead Consulting Letter. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 Commenters also supported highlighting conflicts of interest stemming from affiliates,526 and several commenters included disclosure about affiliates in their mock-ups.527 One industry commenter expressed concern that including solely the proposed conflicts in isolation and on a standalone basis may lead investors to think these are the only meaningful conflicts.528 Other commenters pointed out that if only the proposed conflicts were required to be included, then some firms would not include any conflicts disclosures because their conflicts do not fall within the requisite categories.529 Furthermore, one commenter proposed to allow firms to affirmatively state that they did not have any of these conflicts without further disclosure of the firm’s other conflicts of interest.530 We continue to believe that the conflicts we identified in the proposal should be highlighted to retail investors in the relationship summary. Accordingly, we are including in the final instructions a requirement that firms describe these four conflicts to the extent that any of these conflicts apply to them. Like other sections in the relationship summary, this section will provide firms with more flexibility in the way in which they describe their particular conflicts so that they can tailor the summary to more accurately reflect their specific business. While we are maintaining the proposal’s approach of requiring firms to provide information about certain types of conflicts applicable to them, we are not requiring firms to state as many specific details with respect to such conflicts.531 For example, the proposed instructions would have required firms to provide specific examples of advising on 526 See Comment Letter of Jackson, Grant Investment Advisers, Inc. (Aug. 7, 2018) (‘‘Jackson Grant Letter’’) (stating that other compensation (such as recommending proprietary products and products of affiliates) needs to be addressed for the investor to fully understand the potential for conflicts in any relationship). 527 See SIFMA Letter; Wells Fargo Letter; Schwab Letter I; Comment Letter of Ron A. Rhoades, Western Kentucky University (Dec. 6, 2018) (‘‘Rhoades Letter’’); Stifel Letter (mock-up); Cetera Letter I; Betterment Letter I; ASA Letter (mock-up). 528 IAA Letter I. 529 See Paul Hynes Letter; Betterment Letter I (stating that their business model avoids the proposed conflicts of interest, and proposing an alternate ‘‘alignment of interest’’ section for the section on conflicts of interest). 530 Betterment Letter I (indicating that the firm had none of the proposed enumerated conflicts). 531 In addition, the IAC recommended that the Commission adopt a uniform, plain English document that covers basic information about conflicts of interest, among other topics. See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10. PO 00000 Frm 00218 Fmt 4701 Sfmt 4700 proprietary or affiliated investments or investments paying the firm a share of revenue, and we have removed such requirements from the final instructions. Instead, the relationship summary will focus on four specific ways a firm could make money from retail investors’ investments to highlight that firms have conflicts of interest and encourage retail investors to ask and learn more about them. Additionally, as some commenters pointed out, we agree that not mentioning any conflicts, or permitting the firm to affirmatively state that it has none of the enumerated conflicts, could lead retail investors to conclude that the particular firm does not have any material conflicts. Accordingly, the instructions require a firm that does not have any of the four required categories of conflicts to provide at least one example of the firm’s conflicts of interest. Specially, the instructions require a firm to summarize at least one material conflict of interest that affects retail investors.532 Firms are not expected to disclose every material conflict of interest, and should instead consider what would be most relevant for retail investors to know in deciding whether to select or retain the particular firm. We determined to require an example of a conflict, rather than broadening the instruction to include all conflicts, as some commenters suggested. The language disclosing firms’ standard of conduct and existence of conflicts includes wording to make explicit that the conflicts described in the relationship summary are examples. Firms will disclose at least one of their material conflicts of interest that impact their retail investors, and such a conflict is not limited expressly to financial conflicts. In addition, with respect to broker-dealers, this conflict disclosure (unlike the conflict disclosure obligation in Regulation Best Interest) 533 is not limited to conflicts associated with a recommendation.534 To determine whether a conflict of interest should be disclosed, a firm could consider, for example, the benefit to the firm or its affiliate or the cost to the retail investor. 532 As discussed in Section II.A.1. above, if a required disclosure is inapplicable to a firm’s business, a firm would be permitted to omit or modify that disclosure. General Instruction 2.B. We believe, however, that most firms will have at least one material conflict of interest that they would need to disclose. 533 See Regulation Best Interest Release, supra footnote 47, at Section II.C.1 (Disclosure Obligation). 534 For instance, broker-dealers may include conflicts that affect product offerings to customers who do not obtain recommendations from the firm. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 We believe that an exhaustive list of conflicts in the relationship summary would not as effectively enhance investor understanding of conflicts. More details could inundate investors with information that makes it difficult for them to focus on the fact that conflicts exist and will impact them, and they may not focus on or may not realize the importance of the specific conflicts firms are required to summarize. We also agree with comments that disclosure of all conflicts would be too cumbersome 535 and lengthy for the relationship summary’s intended purpose—that is, highlighting certain aspects of a firm and its services to help retail investors to make an informed choice and to find additional information about a topic. The approach we are adopting of requiring firms to provide examples will make retail investors aware that these types of conflicts exist, but will avoid providing a laundry list of conflicts. Taking into account all of these considerations, we believe that these examples of conflicts of interest should be highlighted for the investor. We recognize that this will be a high-level summary of conflicts and generally will not be a complete description. As discussed further below, we are requiring firms to include a link to additional information on their conflicts of interest.536 This layered disclosure will facilitate investors’ ability to review additional information on conflicts while balancing the highlevel nature of the relationship summary. Conversation Starter and Additional Information. To promote access to information about other firm conflicts, as well as to clarify for retail investors the application of their firms’ standard of conduct as discussed above, firms will include a conversation starter prompting investors to ask about conflicts and a hyperlink to additional information. Specifically, firms must include the following question as a conversation starter: ‘‘How might your conflicts of interest affect me, and how will you address them?’’ 537 The proposal included a longer key question asking about the most common 535 See, e.g., CFA Letter I; SIFMA Letter; Prudential Letter. 536 Item 3.B.(iv) of Form CRS (Firms must include specific references to more detailed information about their conflicts of interest that, at a minimum, include the same or equivalent information to that required by the Form ADV, Part 2A brochure and Regulation Best Interest, as applicable, and brokerdealers that do not provide recommendations subject to Regulation Best Interest, to the extent they prepare more detailed information about their conflicts, must include specific references to such information.). 537 Item 3.B.(iii) of Form CRS. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 conflicts of interest in the firm’s advisory and brokerage accounts and how the firm will address those conflicts when providing services to the retail investor.538 One commenter noted that this key question elicited the same information as provided elsewhere in the relationship summary.539 We shortened the question to avoid this duplication. In addition, the firm’s other conflicts will be disclosed as part of the summary of material conflicts or in the additional conflicts disclosure that firms will cross-reference. The new conversation starter is meant to complement these other disclosures and elicit more information about how specifically the firm’s conflicts of interest could affect the retail investor. Firms will also include specific crossreferences to more detailed information about conflicts of interest that, at a minimum, includes the same or equivalent information to that required about a firm by the Form ADV, Part 2A brochure and/or Regulation Best Interest.540 If a firm is a broker-dealer that does not provide recommendations subject to Regulation Best Interest, to the extent it prepares more detailed information about its conflicts, it must include specific references to such information.541 Firms may include hyperlinks, mouse-over windows, or other means of facilitating access to this additional information and to any additional examples or explanations of such conflicts of interest.542 Over 60% of RAND 2018 survey respondents indicated that they would be ‘‘very likely’’ or ‘‘somewhat likely’’ to click on hyperlinks related to conflicts of interest.543 While the proposal did not require firms to link to additional information with respect to their conflicts, several commenters suggested that the relationship summary include a link to all conflicts.544 We believe that 538 Proposed Item 8 of Form CRS. The proposal included the following question: ‘‘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.’’ 539 See LPL Financial Letter. 540 Item 3.B.(iv) of Form CRS. 541 Item 3.B.(iv) of Form CRS. 542 Item 3.B.(iv) of Form CRS. See also General Instructions 3. and 4. of Form CRS (instructions applicable to electronic delivery). For further discussion of these provisions, see supra Section II.A.3. and footnotes 156 and 158 and accompanying text, and Section II.B.2.(b) and footnotes 348–349. 543 RAND 2018, supra footnote 13. But see Kleimann II, supra footnote 19 (only one interview participant said he would use the link in the conflicts of interest section). 544 See, e.g., Fidelity Letter (mock-up); IAA Letter I (mock-up); see also Kleimann II, supra footnote 19 (redesigned relationship summary suggests a link to more information about conflicts). PO 00000 Frm 00219 Fmt 4701 Sfmt 4700 33535 using layered disclosure through crossreferences to a more detailed discussion of conflicts balances the Commission’s objective of concise disclosure while providing interested investors with tools to easily access additional, useful information. Many industry commenters also suggested that Regulation Best Interest’s and Form CRS’s conflicts disclosures be coordinated, and that any conflict disclosure obligations under Regulation Best Interest should be satisfied upon delivery of the relationship summary.545 We recognize that broker-dealers may need to disclose additional conflicts or disclose additional conflicts at a point in time other than at the beginning of the relationship with an investor or other times the relationship summary is required to be delivered.546 The relationship summary will provide a high-level summary for investors so that they can engage in a conversation with their financial professional about investment advisory or brokerage services, and so that the investors can choose the type of service that best meets their needs. Furthermore, as discussed above in Section II.A (Presentation and Format),547 we believe it is essential to limit the length of the relationship summary and keep the disclosures focused, highlighting these topic areas while encouraging questions and providing access to additional information. As a result, we believe many firms may not be able to capture all of the necessary disclosures about their conflicts in this short summary disclosure.548 The layered disclosure approach should strike a balance between alerting investors of these conflicts while keeping with the intended purpose of the relationship summary. Finally, some commenters argued that the relationship summary should require firms to explain how conflicts will be mitigated or minimized, or that firms should be permitted to state that 545 See, e.g., ACLI Letter; Cambridge Letter; Massachusetts Letter; FSI Letter I; MassMutual Letter; Schwab Letter I; SIFMA Letter; Transamerica Letter; see also Regulation Best Interest Release, supra footnote 47, at n.438 and accompanying text. 546 See Regulation Best Interest Release, supra footnote 47. 547 See supra Section II.A (Presentation and Format). 548 For example, investment advisers must make full and fair disclosure to all clients of all material facts relating to the advisory relationship, including conflicts of interest. See Fiduciary Release, supra footnote 47; General Instruction 3 to Form ADV Part 2. Broker-dealers subject to Regulation Best Interest must also provide full and fair disclosure of material facts, including all material facts relating to conflicts of interest that are associated with the recommendation. See Regulation Best Interest Release, supra footnote 47. E:\FR\FM\12JYR2.SGM 12JYR2 33536 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations a particular firm has fewer conflicts than other firms.549 While we agree that firms should have increased flexibility to describe conflicts, as discussed above, we are not permitting this additional disclosure. The purpose of this section is to highlight for investors that conflicts of interest exist. c. Payments to Financial Professionals Finally, in a change from the proposal, we are adding an additional section to Item 3 that requires a firm to include in its relationship summary the heading ‘‘How do your financial professionals make money?’’ 550 A firm will summarize how its financial professionals are compensated (including cash and non-cash compensation) and the conflicts of interest those payments create.551 For example, the firm must, to the extent applicable, disclose whether financial professionals are compensated based on factors such as: The amount of client assets they service; the time and complexity required to meet a client’s needs; the product sold (i.e., differential compensation); product sales commissions; or revenue the firm earns from the financial professional’s advisory services or recommendations.552 In the Proposing Release, we asked if the relationship summary should include disclosure of compensation received by financial professionals and the related conflicts of interest such compensation might pose. Several commenters supported including disclosures related to the conflicts of interest that financial professionals’ compensation arrangements create.553 Several commenters suggested featuring financial professionals’ compensation in the relationship summary, including in a separate section.554 A number of commenters illustrated the importance 549 See AARP Letter; Betterment Letter I. 3.C. of Form CRS. 551 Item 3.C.(i) of Form CRS. 552 Item 3.C.(ii) of Form CRS. 553 See Proposing Release, supra footnote 5 (requesting comments on whether there are other considerations related to fees and compensation that we should require firms to highlight for retail investors that were not captured in the proposal); see also Jackson Grant Letter; Schwab Letter I; SIFMA Letter; Stifel Letter. 554 See, e.g., Schwab Letter I; SIFMA Letter; Stifel Letter; Jackson Grant Letter. One industry commenter also stated that we should focus on conflicts that result from a financial professional’s financial compensation. SIFMA Letter (also stating this view is consistent with FINRA’s 2013 Conflicts of Interest Report, which specifically identified financial compensation as the major source of conflicts of interest for associated persons); see also CCMC Letter (investor polling) supra footnote 21 (in connection with investor polling, noting that investors identify explaining ‘‘own compensation’’ as one of three ‘‘issues that matter most’’ to them). jbell on DSK3GLQ082PROD with RULES2 550 Item VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 of these disclosures by including sections discussing financial professionals’ compensation in their mock-ups.555 These disclosures generally included more detailed information about how broker-dealers and investment advisers earn money from various sources, in addition to what the retail investor may pay directly. We have concluded that disclosure of conflicts of interest related to a financial professional’s compensation is useful to highlight for retail investors in the relationship summary.556 In particular, the commenters’ mock-up disclosures highlighted the benefit of separately summarizing financial professionals’ compensation to help retail investors identify and assess these conflicts of interest that may affect the services they receive.557 We believe that requiring specific information on financial professional compensation and conflicts related to that compensation will provide improved clarity from the proposal and better help retail investors understand these conflicts and how they might impact a financial professional’s motivation. We also believe it is useful to specifically highlight this conflict for retail investors, as it is a different type of payment and a different type of conflict than a conflict at the firm level. We further believe that by placing this discussion directly after the discussion on fees, costs and conflicts, it will mitigate potential investor confusion. This approach is also consistent with Regulation Best Interest, which treats compensation to financial professionals and the conflicts of interest that such compensation creates as material facts that must be disclosed.558 4. Disciplinary History The relationship summary will include a separate section about whether a firm or its financial professionals have reportable disciplinary history and where investors can conduct further research on these events.559 Inclusion of a separate 555 See Primerica Letter and ASA Letter (including disclosure stating that financial professional compensation is typically affected by the amount of client assets the financial professional is responsible for and the fees and commissions those assets generate); see also SIFMA Letter and Schwab Letter I (including disclosure on how the firm pays professionals who provide investment advice). 556 See Regulation Best Interest Release, supra footnote 47, at Section II.C.1.b. 557 See, e.g., Primerica Letter; SIFMA Letter; Schwab Letter I. 558 See Regulation Best Interest Release, supra footnote 47. 559 As proposed, we used the terms ‘‘legal or disciplinary events.’’ However, we are adopting the PO 00000 Frm 00220 Fmt 4701 Sfmt 4700 disciplinary history section is a change from the proposed relationship summary, where this information was included in the Additional Information section.560 Certain commenters suggested that we remove the requirement that firms disclose whether or not they have disciplinary history.561 Similarly, some commenters suggested that any disciplinary information should simply direct retail investors to resources where they could review a firm’s or a representative’s disciplinary history, without any firm-specific information in the relationship summary.562 We have concluded, however, based on consideration of commenters and investor feedback received through surveys and studies, at roundtables and in Feedback Forms, to include the disciplinary history as a separate section of the relationship summary.563 These comments emphasized the importance of disciplinary history information and advocated that it should be placed in a more prominent position than as part of the Additional Information section.564 Commenters also generally supported firm-specific disclosure as to whether the firm has disciplinary history.565 About 70% of commenters on Feedback Forms responded that they would seek terms ‘‘legal or disciplinary history’’ for greater precision. 560 See Proposing Release, supra footnote 5, at nn.270–71 and accompanying text. 561 See, e.g., Wells Fargo Letter (arguing that any firm-based aspect of disciplinary disclosure is not fair to representatives of the firm without any history of wrongdoing); see also ACLI Letter; New York Life Letter (arguing that any firm-specific disciplinary history disclosure would prejudice large firms). 562 See, e.g., LPL Financial Letter (mock-up suggested that ‘‘[f]or free tools to research our firm, our financial advisors and other firms, including our disciplinary events . . .’’ investors should visit BrokerCheck or IAPD). 563 The IAC also recommended including disciplinary history in the relationship summary. See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10 (‘‘[W]e encourage the Commission to develop an approach to disclosure of disciplinary record that makes it easier for investors to assess the significance of disclosed events, particularly for firms that may have a large number of relatively insignificant technical violations.’’). 564 See, e.g., CFA Letter I (‘‘The required disclosure regarding disciplinary events does not give adequate prominence to this issue.’’); NASAA Letter (‘‘The descriptor ‘Additional Information’ is too vague to describe the important information in this section [and] should be recast as ‘Disciplinary History and Customer Rights and Remedies . . . .’’); Trailhead Consulting Letter (‘‘Legal and Disciplinary Actions are very important for an investor to consider and should not be ‘hidden’ in an Additional Information section. This information deserves its own separate section.’’); IAA Letter. 565 See, e.g., CFA Letter I (‘‘We believe this information is important enough to be highlighted under its own separate heading, ‘Do you have a disciplinary record?’ ’’). E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 out additional information about a firm’s disciplinary history.566 Similarly, more than 70% of investors surveyed in the RAND 2018 report reported that they were ‘‘very likely’’ or ‘‘somewhat likely’’ to look up the disciplinary history of a financial professional.567 However, results from investor studies and surveys and investor comments on Feedback Forms supported the concern that the Additional Information section may not provide enough salience. For example, in the RAND 2018 survey, the Additional Information section was most often selected as one of the two least useful sections of the proposed relationship summary.568 On Feedback Forms, commenters rated the Additional Information section as ‘‘very useful’’ or ‘‘useful’’ less often than any other section of the relationship summary.569 One investor study suggested a reason for these mixed results, finding that participants would skip the Additional Information section, in part because they did not understand that the websites in the section would allow them to review the disciplinary history 566 See Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 3(e)). Some commented that, before viewing the relationship summary, they had not known that they could ask or how to check. See, e.g., Anonymous02 Feedback Form (‘‘did not know how to do that’’); Anonymous03 Feedback Form (‘‘I looked up my advisor while reading through the summary’’); Anonymous26 Feedback Form (‘‘Now I know where to go’’); Anonymous29 Feedback Form (‘‘I didn’t know if asked—they had to answer’’); see also Philadelphia Roundtable (investor participant noting that ‘‘checking your broker’s disciplinary record’’ is ‘‘something that people should do’’). 567 See RAND 2018, supra footnote 13 (‘‘More than 40 percent of respondents reported being very likely to look up the disciplinary history based on the information provided in the Relationship Summary, and another 35 percent reported being somewhat likely to look it up. Only 5 percent reported being not at all likely to do so.’’); see also Kleimann II, supra footnote 19 (study participants who viewed a redesigned form reported that they would research the company they are doing business with’’); but see Schwab Letter I (Koski), supra footnote 21 (only 20% of survey participants selected ‘‘How to find disciplinary information about a firm or its representatives’’ when asked to select the four most important topics for a firm to communicate, from a list of 11 topics). 568 See RAND 2018, supra footnote 14 (Additional Information section rated as one of the two ‘‘least informative’’ sections by 66% of respondents; only 3% selected it as one of the two ‘‘most informative’’); see also Cetera Letter II (Woelfel), supra footnote 17 (84% of survey respondents strongly or somewhat agreed that the ‘‘how to find additional information about a broker/adviser’’ and ‘‘how to find additional information about the firm,’’ fewer than for most other topics out of a series of nine topic options). 569 Feedback Forms Comment Summary, supra footnote 11 (summary of responses to Question 2(f)) (Additional Information section rated as ‘‘not useful’’ or ‘‘unsure’’ by more commenters (20%) and ‘‘very useful’’ by fewer commenters (32%) relative to other sections of the relationship summary). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 of the investment adviser or brokerdealer that they were considering.570 Comments on Feedback Forms similarly suggest that information about how to research a firm’s disciplinary information should be presented more prominently and more simply in the relationship summary.571 After taking comments into consideration, we believe that a separate disciplinary history section is appropriate, with a requirement that firms explicitly state whether or not they have legal or disciplinary history so that investors can find the information in the summary with ease. The section will begin with the heading: ‘‘Do you or your financial professionals have legal or disciplinary history?’’ Firms will answer ‘‘yes’’ or ‘‘no,’’ depending upon whether they or one of their financial professionals have a triggering event enumerated in the instructions, as discussed below. The proposed relationship summary required a statement that the firm has legal and disciplinary events but did not require an affirmative statement that a firm or its financial professionals did not have disclosable events. We are requiring a ‘‘No’’ answer in the final instructions where applicable, given the importance of disciplinary history and to provide a complete answer to the question in the heading. Regardless of whether firms report a ‘‘Yes’’ or ‘‘No’’ answer as to whether they or their financial professionals have legal or disciplinary history, the relationship summary will direct the retail investor to visit Investor.gov/CRS to research the firm and its financial professionals, as proposed.572 This is 570 See Kleimann I, supra footnote 19; see also Kleimann II, supra footnote 19 (noting that interview responses to links in the relationship summary ‘‘suggest that use is dependent on perceived relevance . . . Some of that relevance can be built in with more specific descriptions of what can be found at the link.’’). 571 Some commenters on Feedback Forms suggested moving the Additional Information section forward in the relationship summary. See Anonymous14 Feedback Form (‘‘Recommend add this to beginning of the pamphlet’’); Durgin Feedback Form (‘‘Additional info needs to be moved up’’); Salkowitz Feedback Form (‘‘Move this section to near the beginning’’); Starmer2 Feedback Form (‘‘put Key Questions and Additional Info up front to stimulate a conversation.’’). Others commented that the presentation should be clearer. See, e.g., Anonymous28 Feedback Form (‘‘Would be better titled ‘How to find out about us’ or ‘Other information you need to know’’’); Anonymous29 Feedback Form (‘‘plain language’’); Calderon Feedback Form (‘‘say expressly where that information is found, with linked URL’s’’); Shepard Feedback Form (‘‘the easier it is to access, the better’’); Baker Feedback Form (‘‘Please explain IAPD’’). 572 Item 4.D.(i) of Form CRS. Investor.gov includes a search function that searches the databases Web CRD® and IARD, and this search PO 00000 Frm 00221 Fmt 4701 Sfmt 4700 33537 responsive to RAND 2018 survey results, which indicated that 37% of investors did not know where to research disciplinary history.573 Directing retail investors to the search tool is also consistent with the Commission’s Office of Investor Education and Advocacy initiative to encourage retail investors to do background checks on financial professionals and is intended to increase awareness of available search tools.574 In addition to disciplinary history, the search tools also can provide useful information regarding registration and licensing and financial professional employment history. The triggering events for a statement that a firm does have legal or disciplinary history are the same as proposed.575 Following the heading, firms will be required to state ‘‘Yes’’ in response to the heading questions if they currently disclose or are required to disclose (i) disciplinary information per Item 11 of Part 1A or Item 9 of Part 2A of Form ADV,576 or (ii) legal or disciplinary history per Items 11A–K of Form BD (‘‘Uniform Application for will direct an investor to BrokerCheck and/or IAPD, as appropriate, where the investor can research disciplinary history. 573 See RAND 2018, supra footnote 13. By contrast, 19% of surveyed investors cited the time and effort required and 10% of surveyed investors indicated that they would not look up a firm or financial professional’s disciplinary history because the information was not very important to the investor. Id. We believe this is also consistent with the IAC’s recommendation to ‘‘look at whether it might be beneficial to adopt a layered approach to [disciplinary history] disclosures, with the goal of developing a more abbreviated, user-friendly document for distribution to investors.’’ IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10. 574 See https://www.investor.gov/research-beforeyou-invest. 575 See Proposed Item 7.B. of Form CRS. In the proposal, firms with such events would have been required to state the following: ‘‘We have legal and disciplinary events.’’ Id. For reasons discussed supra, we believe the question-and-answer formatting will make the relationship summary more useful to investors. 576 Item 4.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 Amendments to Form ADV, Investment Advisers Act Release No. 3060 (Jul. 28, 2010) [75 FR 49233 (Aug. 12, 2010)], at 22– 27 (‘‘Brochure Adopting Release’’). 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 a disciplinary event 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. E:\FR\FM\12JYR2.SGM 12JYR2 33538 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 Broker-Dealer Registration’’) 577 except to the extent such information is not released to BrokerCheck pursuant to FINRA Rule 8312.578 Regarding their financial professionals, firms will determine whether they need to include an affirmative statement based on legal and disciplinary information on Form U4,579 Form U5,580 or Form U6.581 In particular, firms will be required to state ‘‘Yes’’ if they have financial professionals for whom disciplinary history is reported per Items 14 A through M on Form U4, Items 7A or 7C through F on Form U5,582 or Form U6 except to the extent such information is not released to BrokerCheck pursuant to FINRA Rule 8312.583 Firms that do not have disclosable events for themselves or their financial professionals in 577 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. 578 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. 579 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. 580 Form U5 (Uniform Termination Notice for Securities Industry Registration) requires information about representatives’ termination from their employers. 581 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. 582 Item 7(b) of Form BD (Internal Review Disclosure) is not released to BrokerCheck by FINRA, pursuant to FINRA Rule 8312(d)(3). 583 Item 4.B.(iii) of Form CRS. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 connection with these provisions will state ‘‘No’’ in answer to the heading.584 As noted above, several commenters opposed the approach of requiring firms to indicate in their relationship summaries whether they or their financial professionals have disciplinary history, questioning the value of the disclosure to retail investors,585 or citing to prejudicial or competitive concerns.586 These firms recommended that the relationship summary include only a prompt for investors to research the disciplinary history of the firm or financial professional, directing them to Investor.gov/CRS.587 We recognize that the disciplinary history of firms and their financial professionals is already publicly available, as commenters have noted. From studies and investor feedback, however, we also understand that investors view disciplinary history as significant to their decision of whether or not to engage with a firm or a financial professional, but in many cases are unaware of the need for researching or the tools available to research whether disciplinary history exists.588 Highlighting disciplinary 4.C. of Form CRS. NSCP Letter (‘‘NSCP members believe that extending the disclosure of disciplinary history to be included in Form CRS would add additional administrative burden and costs outweighing any true benefit to the customer.’’); Wells Fargo Letter (‘‘such a broad statement will add no value’’). 586 See Wells Fargo Letter (arguing that the statement will lead clients to draw unfair conclusions about both the firm and its financial professionals); New York Life Letter (arguing that the statement prejudices larger, established firms that will usually have a small number of disclosure events to report for current or former registered representatives); ACLI Letter (same). 587 See Wells Fargo Letter; New York Life Letter; ACLI Letter. 588 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, at nn.317–19 and accompanying text, available at https://www.sec.gov/news/studies/ 2012/917-financial-literacy-study-part1.pdf (‘‘917 Financial Literacy Study’’) ([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); see also RAND 2018, supra footnote 13 (when investors were asked why they would not look up disciplinary history, 37 percent of all respondents indicated that they did not know where to get the information, whereas 19 percent of all respondents indicated that it would take too much time or effort). PO 00000 584 Item 585 See Frm 00222 Fmt 4701 Sfmt 4700 history in this way provides information to retail investors before they enter into a relationship with a particular firm and financial professional and a ‘‘yes’’ response will alert retail investors that there is disciplinary history they may want to research, review, or discuss with their financial professional.589 As there is no required waiting period between the delivery of the relationship summary to the retail investor and the time that the retail investor may enter into a relationship with or an order placed by a firm, highlighting the disciplinary information allows the retail investor time to consider any disciplinary history before moving forward or to monitor the relationship or financial professional more closely if the retail investor decides to move forward at that time. By basing this disclosure on information that is already reported elsewhere and also requiring the relationship summary to include details about where to find more information, we give retail investors the tools to learn more about firms and financial professionals. We are not persuaded by commenters who believed that these disclosures are unduly prejudicial or would have sufficient competitive concerns and argued that we should not require this information. Firms or financial professionals would have the opportunity to provide more information about and encourage retail investors to ask follow-up questions regarding the nature, scope, or severity of any disciplinary history, so that retail investors have the information they need to decide on a relationship. In particular, financial professionals who themselves have no disciplinary history can make clear that a ‘‘Yes’’ disclosure in response to the heading question relates to the firm and other personnel (if applicable) and not to them. While we recognize that larger firms might be more likely to respond affirmatively to this question than smaller firms, we have determined to require this disclosure because we believe that, on balance, the potential benefit to the retail investor of seeing at a glance whether a firm or its financial professionals have disciplinary history (which may encourage the investor to conduct further research or monitor the relationship or financial professional more closely) justifies requiring the disclosures notwithstanding the concerns raised by commenters, 589 See Miami Roundtable (investor noting that she had gone on Investor.gov to learn about the disciplinary history of her financial professional and noting that she was ‘‘happy when [she] checked’’ the website). E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 particularly given the importance that commenters placed on disciplinary history. A few commenters suggested revisions to the specific events that would trigger a disciplinary event disclosure in the proposed relationship summary.590 We have considered these comments but have determined to adopt the triggers as proposed. As noted in the Proposing Release, those disclosable events are those that we believe may generally assist retail investors in evaluating the integrity of a firm and its financial professionals.591 Additionally, these triggering events are already disclosed on existing systems for other regulatory purposes. As such, there will not be additional regulatory burdens for a determination of disciplinary history for the purposes of the relationship summary. Different requirements between other aspects of Form ADV or Form BD and the relationship summary also could cause confusion and compliance uncertainty. One commenter suggested basing the relationship summary disciplinary disclosure around a standardized set of events that would trigger disclosures specific to the relationship summary.592 This approach may have led to advisers or brokerdealers having publicly listed disclosure events on BrokerCheck or IAPD yet answering ‘‘No’’ to a question of whether they or their financial professionals have legal or disciplinary history. We believe that result could have been confusing or misleading to retail investors. By contrast, the approach we adopt allows for consistency across public information as to whether or not a firm or financial professional has a disciplinary event and leverages existing disclosure reporting systems. We believe that this consistency justifies not adopting a standardized set of events triggering disclosure on the relationship summary. Furthermore, the statement encouraging retail investors to visit Investor.gov/CRS for more information will help retail investors to more easily learn and compare additional details from the 590 See CFA Institute Letter I (‘‘For parity and comparability, we suggest requiring that the specific events that would trigger disclosure under these requirements be the same for both investment advisers and broker-dealers’’); Comment Letter of the Business Law Section of the State Bar of Texas, Investment Funds Committee (Aug. 7, 2018) (advocating that an investment adviser disclose that it has a disciplinary event only based on Item 9 of Part 2A of Form ADV, rather than both Items 9 and 11). 591 See Proposing Release, supra footnote 5, at nn.271–73 and accompanying text. 592 See CFA Institute Letter I. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 firms themselves and from their existing disclosures.593 Firms also will include the following conversation starter: ‘‘As a financial professional, do you have any disciplinary history? For what type of conduct?’’ 594 This conversation starter is intended to take the place of a similarly worded key question.595 However, because this item’s heading asks a similar question about disciplinary history with respect to the firm, we believe that the conversation starter would be most useful specifically with respect to the financial professional. This question will allow retail investors to assess that financial professional’s disciplinary history as well as engage in further discussion about those events or any events applicable to the firm. In addition, this conversation starter is designed to encourage a discussion about any differences between the firm’s disciplinary history and that financial professional’s history, if applicable (e.g., if the financial professional has no disciplinary history while his or her firm has reportable discipline necessitating a ‘‘Yes’’ response to the heading question). 5. Additional Information At the end of the relationship summary, firms will state where the retail investor can find additional information about their brokerage or investment advisory services, as proposed.596 This information should be disclosed prominently at the end of the relationship summary. However, unlike the proposed relationship summary, the adopted instructions do not prescribe the different references that a brokerdealer and investment adviser must include for such direction and do not require a heading for the section.597 4.D. of Form CRS. 4.D.(ii) of Form CRS. 595 See Proposed Item 8.8 of Form CRS (‘‘Do you or your firm have a disciplinary history? For what type of conduct?’’); see also supra Section II.A.4 (discussing removal of the ‘‘Key Questions to Ask’’ section). 596 See Proposed Item 7.E. of Form CRS. We are also requiring a statement of where retail investors can request a copy of the relationship summary. 597 As proposed, broker-dealers would have had to state that, to find additional information, retail investors should visit BrokerCheck, the firm’s website, and the retail investor’s account agreement. In addition, broker-dealers would link to a portion of their website with up-to-date information and a link to BrokerCheck. If the firm did not have a public website, the broker-dealer would have been required to include a toll-free telephone number where retail investors could request up-to-date information. See Proposed Item 7.E.1. of Form CRS. Investment advisers would have had to state that, to find additional information, retail investors should see the firm’s Form ADV brochure on IAPD PO 00000 593 Item 594 Item Frm 00223 Fmt 4701 Sfmt 4700 33539 This approach is consistent with our intent to provide firms additional flexibility to provide information most useful to retail investors.598 In addition, removing the prescribed wording from this section avoids potentially duplicative disclosure, as the Introduction now includes a statement that free and simple tools are available to research firms and financial professionals at Investor.gov/CRS. Investor.gov provides investors access to search for firms on BrokerCheck and IAPD, references to both of which would have been required in prescribed wording in the proposed relationship summary.599 The flexibility is also responsive to observations reported in surveys and studies and comments from investors at roundtables and on the Feedback Forms indicating that investors found the proposed ‘‘Additional Information’’ section less helpful compared to other sections in the relationship summary.600 Consistent with our layered disclosure approach, we encourage hyperlinks, QR codes, or other means of facilitating access for retail investors to obtain additional information.601 We also are not adopting the proposed requirement that firms include information on how retail investors should report complaints about their investments, investment accounts, or financial professionals in the relationship summary.602 While some on Investor.gov and any brochure supplement the firm provides. If the adviser maintains its current Form ADV on a public website, it would have had to state the website address. If the adviser had no such website, a link to adviserinfo.sec.gov would have had to be provided as well as a toll-free telephone number where retail investors could request up-to-date information. See Proposed Item 7.E.2. of Form CRS. 598 See supra footnotes 76–83 and accompanying text. 599 See Item 1.A. of Form CRS. As discussed above, we are requiring firms to include the reference to Investor.gov/CRS in the Introduction in part to highlight to retail investors the ability to research firms and financial professionals as well as the ability to review educational materials at the website. See supra Section II.B.1. 600 See supra footnote 568–569 and accompanying text; see also Philadelphia Roundtable (confusion regarding the difference between FINRA and the Commission as well as a statement that there are ‘‘too many websites’’ in the Additional Information section). 601 See supra Section II.A.3. 602 The proposal included the following instruction in the Additional Information 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, 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 E:\FR\FM\12JYR2.SGM Continued 12JYR2 33540 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 commenters supported including information on how retail investors could report complaints,603 others disagreed with this approach604 or suggested that it may not be information that is as critical at the beginning of a relationship.605 Commenters submitting their own mock-ups of the relationship summary likewise took different approaches as to whether or not to include this information.606 We are requiring a conversation starter in this part of the relationship summary, which incorporates and adapts a key question from the proposal: ‘‘Who is my primary contact person? Is he or she a representative of an investment adviser or a broker-dealer? Who can I talk to if I have concerns about how this person is treating me?’’ 607 With required text features to highlight this conversation starter, as well as information from the Introduction to direct retail investors to Investor.gov/CRS, we believe that retail telephone numbers for the SEC and FINRA no less often than annually and update as necessary.’’ Proposed Item 7.D. of Form CRS. 603 See, e.g., NASAA Letter (suggesting that the Additional Information section be recast as ‘‘Disciplinary History and Customer Rights and Remedies’’ and include, among other things, a discussion of the legal rights and the remedies available to customers in the event of breach (including whether the customer will be subject to mandatory arbitration) and contact information for regulators where investors may file complaints or ask questions about disciplinary history); see also Philadelphia Roundtable (investor expressing that she would like to know where to file a complaint, but not realizing that the desired information was on the proposed relationship summary). 604 See Wells Fargo Letter (‘‘We also don’t agree that Form CRS needs to get into details on how an investor can report a problem. Such a disclosure is outside of the overall purpose of the summary and will detract from both the readability and length of the document.’’). 605 See Trailhead Consulting Letter (‘‘[T]his document is encouraged or required to be delivered prior to entering into a relationship or transaction, so hopefully problems have yet to occur. The account statements or investment adviser reports should include statements informing investors how to report a problem.’’). But see Cetera Letter II (Woelfel) (86% of survey respondents strongly or somewhat agreed that ‘‘how to report a problem with your investments’’ was an important topic to be discussed in the relationship summary and 84% of survey respondents strongly or somewhat agreed that ‘‘how to report a problem with a financial professional’’ was an important topic; within a range of 88% to 81% of ratings for 9 different topics). 606 Compare, e.g., LPL Financial Letter (including hyperlinks to BrokerCheck and IAPD in part ‘‘to report a problem’’ in mock-up) and IAA Letter I (no reference to problems or reporting complaints in mock-up). 607 Item 5.C. of Form CRS. In comparison, the analogous proposed key question was ‘‘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?’’ Proposed Item 8.10 of Form CRS. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 investors will be able to find information on who to contact and how to report a complaint to the firm at the appropriate time, and Investor.gov includes links to submit questions and complaints to the Commission. In light of the mixed feedback from commenters and the changes to the form designed to enhance flexibility and usability, we are not requiring firms to include more detailed information about submitting complaints, as proposed, to enable the disclosures in the relationship summary to focus on other information about the firm and its services. We are also requiring firms to include a telephone number where retail investors can request up-to-date information and request a copy of the relationship summary.608 This differs from the proposal, which required only those firms that do not have a public website to include a toll-free number that retail investors may call to request documents.609 Some of the commenter mock-ups included a telephone number even though the firms maintained a public website.610 A commenter who recommended including a contact telephone number in the relationship summary did not specify that it must be toll-free and we received a mock-up with a placeholder for a telephone number that was not specifically tollfree.611 After consideration of these comments and mock-ups, we determined that all firms should include a telephone number in the relationship summary. We continue to believe it is important for retail investors to have firm contact information in the event that they would like to request disclosures and there is no public website for that firm that the investor may easily access. In addition, we anticipate that requiring all firms to include a telephone number will more readily accommodate retail investors who prefer communicating with firms over the phone and will facilitate their requests for up-to-date information and a copy of the relationship summary. If firms do not already have a toll-free telephone number, they will not be required to obtain one to comply with the requirements of the relationship summary. Firms will have the flexibility to decide whether or not the telephone number they provide in their relationship summary will be toll-free. 608 Item 609 See 5.B. of Form CRS. Proposed General Instruction 8.(a) to Form CRS. 610 See, e.g., Fidelity Letter (mock-up) and Primerica Letter (mock-up). 611 See IAA Letter I and Primerica Letter (mockup). PO 00000 Frm 00224 Fmt 4701 Sfmt 4700 6. Proposed Items Omitted in Final Instructions The proposal included two sections that we are not adopting as separate sections in the relationship summary.612 As discussed above, the relationship summary will not include a separate section for ‘‘Key Questions to Ask;’’ instead, the topics covered by the proposed key questions will be integrated throughout the relationship summary as headings to items or as ‘‘conversation starters.’’ 613 The relationship summary will also not include the Comparisons section for investment advisers and broker-dealers, as proposed. Standalone broker-dealers would have been required to include the following information, using prescribed wording, about a generalized retail investment adviser: (i) The principal type of fees; (ii) services investment advisers generally provide; (iii) the applicable legal standard of conduct; and (iv) certain incentives based on an investment adviser’s asset-based fee structure. For standalone investment advisers, this section would have required them to include parallel categories of information regarding broker-dealers.614 Many commenters opposed including discussions comparing investment advisers and broker-dealers. Some commenters stated that it was inappropriate for the Commission to require firms to describe products and services that they do not offer and about which they may have limited or no expertise.615 Other commenters had concerns with the prescribed wording, which they said may increase investor confusion or be misleading with prescribed wording that would not reflect the likely relationship that an investor would have with a specific firm.616 Some commenters believed that the wording in the comparison section 612 In addition to the reasons discussed below, removing these sections also may help alleviate concerns from commenters that the proposed relationship summary was trying to ‘‘do too much.’’ E.g., Schwab Letter I; SIFMA Letter; Comment Letter of UBS Global Wealth Management (Aug. 7, 2018) (‘‘UBS Letter’’); see also AARP Letter (suggesting that the relationship summary be shortened to avoid ‘‘information overload’’); CFA Institute Letter I (the proposed relationship summary is ‘‘too wordy, lacks design elements that engage the reader, and, in many respects, is too nuanced for the average retail investor who is trying to understand the differences between brokerdealers and investment advisers’’). 613 See supra Section II.A.4. 614 See Proposed Item 5 of Form CRS. 615 See, e.g., ACLI Letter. 616 See IAA Letter I (arguing that the wording of the section was ‘‘too boilerplate’’ and would prohibit firms from providing useful information about what the specific investor’s relationship would be with a firm). E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 favored broker-dealers over investment advisers.617 Others indicated that the comparisons should allow for discussions regarding insurance products.618 As an alternative, some commenters suggested that the Commission include the information intended for the proposed Comparison section on the Commission’s website as educational material,619 and that firms could link to the educational material from their relationship summaries.620 Given such concerns and suggestions, a number of mock-ups did not include a comparison section.621 Comments on Feedback Forms indicated that this section was less useful than other sections of the relationship summary; fewer commenters rated this section as either ‘‘very useful’’ or ‘‘useful’’ compared to the other sections of the relationship summary.622 Many narrative comments on Feedback Forms relating to this section (even from those who graded the section as ‘‘useful’’) indicated that these commenters did not find this section informative and wanted more information to help them compare firms.623 Feedback on this section from the RAND 2018 report and other surveys and studies was limited because the RAND 2018 report, and other surveys and studies, generally focused on the sample proposed dual registrant relationship summary. However, in a survey that focused on the standalone 617 See CFA Letter I (arguing that ‘‘there are a number of statements . . . that many, if not most, advisers would likely object to’’ in the prescribed wording); IAA Letter I. 618 See New York Life Letter; Northwestern Mutual Letter. 619 See IAA Letter I; Schnase Letter; Pickard Djinis and Pisarri Letter. 620 See, e.g., SIFMA Letter; Schwab Letter I. 621 See, e.g., IAA Letter I; SIFMA Letter; Schwab Letter I. Other mock-ups included a ‘‘first level’’ disclosure that involved generalized comparisons between investment advisers and broker-dealers, with the relationship summary including firmspecific information. See LPL Financial Letter; Primerica Letter. 622 Twenty-nine commenters (about 30%) on Feedback Forms rated the comparison section as ‘‘Very Useful’’; 39 (about 40%) rated it as ‘‘Useful’’; 17 (almost 20%) responded that they did not find this section useful or were unsure. See Feedback Forms Comment Summary (responses to Question 2(d), supra footnote 11). 623 See, e.g., Anonymous07 Feedback Form (‘‘Any example of how you use either or both for achieving goals’’); Anonymous13 Feedback Form (‘‘. . . list what is the same for both, as much is, then only list differences in separate columns. What I really want is what’s the differences’’); Brantley Feedback Form (‘‘when is it best to use each type of account— maybe some examples’’); Coleman Feedback Form (‘‘. . . a word that suggests when one type of relationship would be more beneficial’’); Hawkins Feedback Form (‘‘There are so many different account types and investment options. More information needed’’); Murphy Feedback Form (‘‘Too complicated to follow’’); Schreiner Feedback Form (‘‘highlight differences’’). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 investment adviser relationship summary, most survey respondents indicated that this section was not useful in helping them to understand differences between firms.624 We have determined not to require a separate Comparisons section in the relationship summary for broker-dealers and investment advisers that are not dual registrants. In lieu of the separate section with prescribed wording, the final instructions include several requirements that will help facilitate comparisons among firms. First, each relationship summary will be required to provide answers to the same questions in a standard order.625 Second, dual registrants will be required to provide either a combined relationship summary describing both brokerage and advisory services, presenting the information with equal prominence and in a manner that facilitates comparison of the two types of services or, alternatively, will be required to provide separate relationship summaries that clearly distinguish and facilitate comparison of the firm’s brokerage and investment advisory services.626 Similarly, a firm that has an affiliate providing brokerage or advisory services may choose to prepare a single relationship summary, or two separate relationship summaries, discussing the services provided by both firms, but only if the relationship summary or summaries are designed in a manner that facilitates comparison of the brokerage and investment advisory services.627 These changes enhance the relationship summary’s usability and design and, we believe, will improve comparisons among firms by retail investors using the relationship summaries. The relationship summaries will have differentiated, firm-specific information in a comparable format as compared to the proposed approach of requiring prescribed and more generalized information. We believe this comparability and differentiation among firm relationship summaries will enhance usability for retail investors. In 624 See Betterment Letter I (Hotspex), supra footnote 18 (only 23% of survey respondents indicated that the disclosure on a version of the sample proposed standalone adviser relationship summary helped them to understand how other investment firms differed from Betterment). 625 See supra Section II.A.2. 626 See supra Section II.A.5. Additionally, and as noted above, firms that prepare two separate relationship summaries must deliver both relationship summaries to each retail investor with equal prominence and at the same time, without regard to whether the particular retail investor qualifies for those retail services or accounts. See id.; see also General Instruction 5.A. to Form CRS. 627 See General Instruction 5.B.(i) to Form CRS. PO 00000 Frm 00225 Fmt 4701 Sfmt 4700 33541 addition, removing the prescribed wording allows firms to describe their services and fees more accurately while simultaneously mitigating concerns commenters raised regarding potentially misleading or inappropriate prescribed wording. Investors seeking more general information about investment advisers and broker-dealers will know they can refer to educational materials that are available on the Commission’s website, Investor.gov, and elsewhere for investor research and education, including Investor.gov/CRS, which the relationship summary’s Introduction must reference.628 C. Filing, Delivery, and Updating Requirements We are adopting the filing, delivery, and updating requirements with several modifications from the proposal. Firms will file copies of their relationship summaries with the Commission, will update the disclosures when the information becomes materially inaccurate, and will communicate any changes to retail investors who are existing clients or customers. The delivery requirements are designed to ensure a relationship summary is provided before or at the time a retail investor enters into a relationship with the firm and when changes are made to the services the firm provides. We made several modifications to the proposed requirements in response to comments, in order to make it easier for retail investors to discern changes in updated relationship summaries, streamline the filing requirements, and provide greater clarity regarding several of the delivery requirements. As described further below, some of the key revisions include: • Broker-Dealer Initial Delivery Obligations. Broker-dealers will be required to deliver the relationship summary before or at the earliest of: (i) A recommendation of an account type, a securities transaction, or an investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) the opening of a brokerage account for the retail investor, instead of before or at the time the retail investor first engages the broker-dealer’s services, as proposed. We encourage delivery of the relationship summary to new or prospective clients or customers at the first possible opportunity, including the initial point of contact. • Other Delivery Obligations. Firms will deliver the relationship summary to existing retail investor clients and customers before or at the time firms open a new account that is different 628 See E:\FR\FM\12JYR2.SGM Item 1.B. of Form CRS. 12JYR2 33542 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 from the retail investor’s existing account, as was proposed. In addition, firms will deliver the relationship summary when they recommend that the retail investor roll over assets from a retirement account, or when they recommend or provide a new service or investment outside of a formal account (e.g., variable annuities or a first-time purchase of a direct-sold mutual fund through a ‘‘check and application’’ process). In response to commenters’ concerns, these changes are intended to replace the proposed instruction that firms deliver the relationship summary when making changes to an existing account that would ‘‘materially change the nature and scope’’ of the firm’s relationship with the retail investor with more concrete delivery triggers. • Highlighting Changes. In a change from the proposal, we are adding a requirement that firms delivering updated relationship summaries to existing clients or customers also highlight the most recent changes by, for example, marking the revised text or including a summary of material changes. This additional disclosure must be filed as an exhibit to the unmarked amended relationship summary (but would not be counted toward the two-page or four-page limit, as applicable). • New Filing Requirements. As proposed, we are requiring that firms file the relationship summary using a text-searchable format. However, in response to comments received, we are also requiring that the filings contain machine-readable headings to enhance the ability to compare information submitted by different firms. Also in response to comments, which we solicited on this topic, we are changing the system that broker-dealers will use to file Form CRS from EDGAR, as proposed, to Web CRD®. Dual registrants will be required to file their relationship summaries using both IARD and Web CRD®. Finally, we are revising the definition of retail investor to align more closely with the definition of ‘‘retail customer’’ in Regulation Best Interest. As discussed, below, we do not believe that this results in substantive changes in the definition as proposed. 1. Definition of Retail Investor For purposes of Form CRS, ‘‘retail investor’’ is defined as ‘‘a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes.’’ 629 The proposal defined the 629 General Instruction 11.E. to Form CRS. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 term retail investor as ‘‘a prospective or existing client or customer who is a natural person (an individual), including trusts or other similar entities that represent natural persons, even if another person is a trustee or managing agent.’’ This definition was different from the definition of ‘‘retail customer’’ in proposed Regulation Best Interest 630 because the relationship summary was intended for an earlier stage of the relationship between an investor and a financial professional, and we thought it would be beneficial for all natural persons to receive information to facilitate their account choices.631 Many commenters recommended that we use a single definition for both ‘‘retail investor’’ and ‘‘retail customer’’ because consistent definitions would facilitate compliance and administrative efficiency.632 Commenters were concerned that differences between the definitions could result in a requirement to deliver the relationship summary to broker-dealer customers who may not be ‘‘retail customers’’ for purposes of Regulation Best Interest.633 Many commenters further recommended that the definitions of ‘‘retail investor’’ and ‘‘retail customer’’ should both be conformed to rules issued by FINRA, which use a net worth test to distinguish institutional and ‘‘retail’’ customers.634 Commenters also asked us to clarify that the relationship summary need not be delivered to certain professionals retained to represent a natural person 635 and address whether 630 Compare Proposed Exchange Act rule 15l– 1(b)(1) (defining retail customer to mean ‘‘a person, or the legal representative of such person, who: (A) Receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an associated person of a broker or dealer; and (B) Uses the recommendation primarily for personal, family, or household purposes.’’). 631 Proposing Release, supra footnote 5, at Section II, at n.29. 632 See Committee of Annuity Insurers Letter (‘‘a standardized definition . . . would be more efficient and enable firms to more easily comply’’); ICI Letter (‘‘a single definition . . . would provide important administrative efficiencies, facilitate compliance, and avoid confusion’’); see also Bank of America Letter; CFA Letter I; Cetera Letter I; Fidelity Letter; Comment Letter of Franklin Resources, Inc. (Aug. 6, 2018); Invesco Letter; Comment Letter of Morgan Stanley Smith Barney, LLC (Aug. 7, 2018) (‘‘Morgan Stanley Letter’’); Oppenheimer Letter; Comment Letter of Raymond James Financial (Aug. 7, 2018) (‘‘Raymond James Letter’’); SIFMA Letter; TIAA Letter; Transamerica Letter. 633 See, e.g., SIFMA Letter; TIAA Letter. 634 See, e.g., SIFMA Letter (referring to FINRA Rule 2210); Cetera Letter I; Investacorp Letter; Morgan Stanley Letter; TIAA Letter; UBS Letter; Wells Fargo Letter. 635 E.g., Comment Letter of the American Bankers Association (Aug. 7, 2018) (‘‘American Bankers Association Letter’’); IAA Letter I; ICI Letter; Oppenheimer Letter; Prudential Letter; T. Rowe Letter; Wells Fargo Letter. PO 00000 Frm 00226 Fmt 4701 Sfmt 4700 participants in workplace retirement plans will be retail investors who should receive the relationship summary.636 In response to comments, the final instructions adopt a definition of retail investor that is consistent with the definition of retail customer in Regulation Best Interest, but differs to reflect differences between the relationship summary delivery requirement and the obligations of broker-dealers under Regulation Best Interest, including that the relationship summary is required whether or not there is a recommendation and covers any prospective and existing clients and customers (i.e., a person who ‘‘seeks to receive or receives services’’) of investment advisers as well as brokerdealers.637 Specifically, under Regulation Best Interest, retail customer will be defined as ‘‘a natural person, or the legal representative of such natural person, who: (A) Receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an associated person of a broker or dealer; and (B) uses the recommendation primarily for personal, family, or household purposes.’’ 638 Like the definition of retail customer in Regulation Best Interest, the definition of retail investor in the final instructions includes natural persons 639 who seek to receive or receive services ‘‘primarily for personal, family or household purposes’’ and the ‘‘legal representatives of such natural persons.’’ In addition, we provide an interpretation on who would be considered to be a ‘‘legal representative’’ for purposes of this definition. The proposed definition of retail investor did not include the phrase ‘‘personal, family or household purposes.’’ No commenters addressed whether or not to include this phrase in the Form CRS definition of retail investor, other than commenting 636 E.g., Comment Letter of Empower Retirement (Aug. 2, 2018) (‘‘Empower Retirement Letter’’); Fidelity Letter; Comment Letter of Groom Law Group (Aug. 7, 2018) (‘‘Groom Law Letter’’); IAA Letter I; ICI Letter; IRI Letter; Invesco Letter; Comment Letter of the National Association of Government Defined Contribution Plans (Aug. 7, 2018) (‘‘NAGDA Letter’’); Oppenheimer Letter; Comment Letter of SPARK Institute, Inc. (Aug. 7, 2018) (‘‘SPARK Letter’’); T. Rowe Letter. 637 See Regulation Best Interest Release, supra footnote 47, at Section II.B.3.c. 638 Exchange Act Rule 15l–1(b)(1). 639 The proposed definition used the language ‘‘a natural person (an individual).’’ While the final definition excludes the parenthetical reference to ‘‘an individual,’’ we do not intend any substantive change because a reference to a natural person typically includes any individual. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations generally that they supported conforming both definitions. Commenters did comment and request clarification of this aspect of the definition of ‘‘retail customer’’ in Regulation Best Interest.640 We believe the final definition of retail investor remains consistent with our objective to provide all natural persons with information to facilitate their understanding of their choices among firms and types of accounts. Firms will be required to deliver the relationship summary to individuals seeking brokerage and investment advisory services in connection with any of the many different reasons that an individual may seek these services, including, for example, retirement, education and other personal, family or household saving and investing objectives. The final definition of retail investor will exclude natural persons seeking these services for commercial or business purposes, such as, for example, where an employee seeks services for an employer or an individual seeks services for a small business or on behalf of another non-natural person entity such as a charitable trust. However, firms must deliver the relationship summary to natural persons who might be seeking services for a mix of personal and commercial or other non-personal purposes, such as a sole proprietor or small business owner who may engage a firm or financial professional for multiple accounts and for personal as well as business purposes. Where firms do not know whether a natural person is seeking services for something other than personal, family, or household purposes at the beginning of a relationship, they may treat that natural person as a retail investor for purposes of delivery of the relationship summary.641 As in the proposal, the final retail investor definition will capture natural persons without any distinction based on net worth. While a number of commenters argued that firms should not be required to deliver a relationship summary to investors that meet certain asset or net worth thresholds,642 others jbell on DSK3GLQ082PROD with RULES2 640 See Regulation Best Interest Release, supra footnote 47, at Section II.B.3a (describing comments). 641 As explained in Regulation Best Interest Release, supra footnote 47, at Section II.B.3a, we interpret ‘‘personal, family or household purposes’’ as used in the definition of retail customer to mean any recommendation to a natural person for his or her account, and we believe that, pursuant to the Care Obligation of Regulation Best Interest, brokerdealers are able to obtain sufficient facts to determine the purpose for which a recommendation will be used. 642 For example, SIFMA’s comments refer to FINRA Rule 2210, which treats accounts of natural VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 opposed narrowing the definition based on a net worth test or other test.643 We continue to believe that the retail investor definition should not distinguish based on a net worth or other asset threshold test and that all individual investors would benefit from clear and succinct disclosure regarding key aspects of available brokerage and advisory relationships. As noted in the proposal, section 913 of the Dodd-Frank Act defines ‘‘retail customer’’ to include natural persons and legal representatives of natural persons without distinction based on assets or net worth.644 Further, we believe that it also may be impractical to include a net worth or other test based on asset thresholds in the definition because it could be difficult for firms to determine a retail investor’s net worth at the outset of the relationship when the relationship summary must be provided. To conform definitions, the final definition of retail investor substitutes the language ‘‘the legal representative of such natural person’’ for language in the proposal referring to ‘‘a trust or other similar entity that represents natural persons, even if another person is a trustee or managing agent of the trust.’’ 645 We believe this is a clarification and not a substantive change from the proposal because it retains coverage of trusts and other similar legal entities that represent natural persons, and the proposal contemplated that certain legal representatives, e.g., a trustee or managing agent, would receive a relationship summary on behalf of a trust or other similar legal entity. Further, we clarify that we interpret a persons with $50 million or more in assets as institutional investors; SIFMA explains that these investors are ‘‘among the wealthiest and most sophisticated customers and often have multiple professional fiduciaries and advisers, apart from their broker-dealer relationships’’ and ‘‘do not function as ‘retail customers’ ’’; see also Cetera Letter I; Investacorp Letter; Morgan Stanley Letter; TIAA Letter; UBS Letter; Wells Fargo Letter. Other commenters suggested different tests of financial sophistication, e.g., Advisers Act Rule 205–3 definition of ‘‘qualified clients’’ (a $2 million net worth test), see Comment Letter of American Investment Council (Aug. 7, 2018) (‘‘American Investment Council Letter’’); Comment Letter of Loan Syndications and Trading Association (Aug. 7, 2018); Comment Letter of the Managed Funds Association Alternative Investment Management Association (Aug. 7, 2018); or the section 2(a)(51) of the Investment Company Act definition of ‘‘qualified purchaser’’ ($5 million net worth test). See Fidelity Letter; Pickard Djinis and Pisarri Letter. 643 See, e.g., Morningstar Letter (‘‘any unequal distribution of this information would be arbitrary’’); see also AARP Letter; CFA Letter I; Trailhead Consulting Letter. 644 Proposing Release, supra footnote 5, at Section II, at text accompanying nn.31–32. 645 General Instruction 11.E. to Form CRS. PO 00000 Frm 00227 Fmt 4701 Sfmt 4700 33543 ‘‘legal representative’’ of a natural person to cover only non-professional legal representatives (e.g., a nonprofessional trustee that represents the assets of a natural person and similar representatives such as executors, conservators, and persons holding a power of attorney for a natural person).646 In referring to nonprofessional legal representatives, we intend to capture persons who are acting on behalf of natural persons and are not regulated financial services professionals retained by natural persons to exercise independent professional judgment. This responds to those commenters who argued that it should not be necessary to provide a relationship summary to regulated professionals in the financial services industry, such as registered investment advisers and broker-dealers, corporate fiduciaries (e.g., banks, trust companies and similar financial institutions) and insurance companies, and the employees or other representatives of such advisers, broker-dealers, corporate fiduciaries and insurance companies.647 Accordingly, non-professional legal representatives would not include such regulated financial services professionals. We agree with these commenters that delivery of the relationship summary to such regulated financial services professionals retained by natural persons to exercise independent judgment will not further our objective of facilitating retail investors’ understanding of their account choices.648 Importantly, however, this will not relieve firms or financial professionals retained to represent the assets of natural persons from their own obligations to deliver the relationship summary to clients or customers who are retail investors. Commenters offered varying points of view about whether participants of workplace retirement plans should be treated as retail investors who receive the relationship summary. Some recommended that the definition of retail investor should include plan participants.649 Others argued against 646 See ICI Letter (recommending that the Commission ‘‘make explicit in the definition of ‘retail investor’ that a ‘legal representative’ of a natural person ‘‘means an executor, conservator, or a person holding a durable power of attorney for a natural person’’). 647 See, e.g., American Bankers Association Letter; Bank of America Letter; IAA Letter I; Invesco Letter; ICI Letter; Oppenheimer Letter; Prudential Letter; T. Rowe Letter. 648 See, e.g., American Bankers Association Letter; Bank of America Letter; IAA Letter I; Invesco Letter; ICI Letter; Oppenheimer Letter; Prudential Letter; T. Rowe Letter. 649 See ICI Letter; Invesco Letter; Oppenheimer Letter; Trailhead Consulting Letter; see also IRI E:\FR\FM\12JYR2.SGM Continued 12JYR2 33544 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 delivering a relationship summary to plan participants, explaining that a relationship summary would confuse participants and would duplicate other required disclosures.650 Several commenters suggested that only plan participants that choose to retain a firm or financial professional in connection with assets in his or her plan account should receive a relationship summary.651 Commenters also asked us to clarify whether the definition of retail investor would include participants in plans not subject to ERISA, such as governmental or other non-ERISA workplace retirement plans meeting requirements under section 403(b) or 457 of the Internal Revenue Code of 1986, as amended (‘‘Internal Revenue Code’’ or ‘‘Code’’), and individual retirement accounts (‘‘IRAs’’) (including SEPs and SIMPLE IRAs).652 In response to comments, we are clarifying that the relationship summary applies when retail investors seek services for their retirement accounts as well as non-retirement accounts because retirement savings is a personal, household or family purpose. Accordingly, the definition of retail investor will include a natural person seeking to select and retain a firm to provide brokerage or advisory services for his or her own retirement account, including but not limited to IRAs and individual accounts in workplace retirement plans, such as 401(k) plans and other tax-favored retirement plans.653 For example, firms will be Letter (permit delivery of Form CRS using media approved by the plan sponsor). 650 See Empower Retirement Letter (noting that plans covered by ERISA ‘‘have named fiduciaries responsible for ensuring each plan is operated in the best interest of plan participants . . . [and who] are already obligated pursuant to ERISA § 404a–5 to provide participants with detailed disclosures related to those investment choices.’’); Groom Law Letter (noting that ‘‘the decision to engage a brokerdealer for purposes of providing services to the plan is made at the plan sponsor level and not at the participant level); Comment Letter of Principal Financial Group (Aug. 7, 2018) (‘‘Principal Letter’’). 651 See T. Rowe Letter (noting that Form CRS should apply ‘‘if an individual chooses to retain a broker-dealer or advisor to provide recommendations or management regarding his or her retirement plan accounts . . . [but] ‘‘if a plan fiduciary selects a broker-dealer or adviser to provide such services to its plan participants . . . we do not think Form CRS should apply); Prudential Letter; SPARK Letter. 652 See ICI Letter; Invesco Letter; Oppenheimer Letter; T. Rowe Letter. 653 Such IRAs include, for example, individual retirement accounts and individual retirement annuities described by section 408(a) and (b) of the Internal Revenue Code, ‘‘simplified employee pensions’’ (or (SEPs) described by section 408(k) of the Code, and simple retirement accounts described by section 408(p) of the Code (SIMPLE IRAs). In response to commenters, we also clarify that workplace retirement plans include any arrangement available at a workplace that provides VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 required to deliver a relationship summary to plan participants seeking advice about whether to take a distribution from a 401(k) plan or other workplace retirement plan and how to invest that distribution. Similarly, a firm will be required to deliver a relationship summary to a plan participant seeking to retain the firm to provide brokerage or advisory services for the participant’s individual account held in a 401(k) plan or other workplace retirement plan.654 However, participants in 401(k) plans and other workplace retirement plans will not be retail investors for purposes of the Form CRS delivery obligation when making certain ordinary plan elections that do not involve selecting or retaining a firm to provide brokerage or advisory services. We understand, for example, that participants in workplace retirement plans generally do not choose the firm that provides brokerage or advisory services in connection with certain ordinary plan elections, such as whether to enroll in the plan, make or increase plan contributions, or how to allocate contributions and plan account balances among a designated menu of plan investment options. We designed the relationship summary to assist investors in understanding their choices when they seek to engage a firm to provide brokerage and advisory services. Even if a financial professional or other firm representative assists a participant directly, e.g., at an enrollment meeting or through a call center interaction, the participant generally would not be making the type of account or firm choice contemplated by a relationship summary because the plan’s sponsor or another representative designated by the terms of the plan (e.g., a trustee or other fiduciary or other responsible party) (a ‘‘plan representative’’) already has selected the retirement benefits or allows saving for retirement, including, for example, any 401(k) plan or other plan that meets requirements for qualification under Code section 401(a), deferred compensation plans of state and local governments and taxexempt organizations described by Code section 457, and annuity contracts and custodial accounts described by Code section 403(b). Likewise, the definition of retail investor includes natural persons seeking brokerage or advisory services for other taxfavored savings arrangements such as an Archer Medical Savings Account described by Code section 220(d), a Health Savings Accounts described by Internal Revenue Code section 223(d) and any similar tax-favored health plan saving arrangement, a Coverdell education savings account described by Code section 530 and a qualified tuition program or ‘‘529 plan’’ established pursuant to Code section 529. 654 For example, we understand that, although not common, some 401(k) plans and other individual account plans provide participants total discretion to choose an investment adviser or broker-dealer to provide services for their individual plan account. See, e.g., 29 CFR 2550.404c–1(f), Example 9. PO 00000 Frm 00228 Fmt 4701 Sfmt 4700 firm, has negotiated the terms of service, and remains responsible for supervising the firm.655 We agree with commenters that delivering a relationship summary under these circumstances could be confusing to participants and duplicative of already required disclosures. Accordingly, plan participants should not be viewed as ‘‘seeking or receiving services’’ for purposes of the Form CRS definition of retail investor when they are merely electing among plan features offered by firms and financial professionals retained and supervised by a plan representative. This includes a participant’s decision to invest his or her account balance through an in-plan self-directed brokerage account option or to select an in-plan managed account service option, where a plan representative retains and supervises the broker-dealer or investment advisory firm providing such services to the plan. Finally, commenters asked us to address whether workplace retirement plans and their representatives (e.g., plan sponsors, trustees, and other fiduciaries) and service providers will be retail investors entitled to receive Form CRS. In the proposal, we excluded workplace retirement plans and their representatives from the definition of retail investor.656 Most commenters agreed with this approach; some noting that workplace retirement plans and their representatives would not benefit from receiving a Form CRS.657 Two 655 This approach differs from our approach to defining retail customer for purposes of Regulation Best Interest to recognize differences between the relationship summary requirement and the obligations of broker-dealers under Regulation Best Interest. As discussed in the Regulation Best Interest Release, supra footnote 47, at Section II.B.3.a, a participant receiving recommendations for the participant’s individual account held in a 401(k) or other workplace retirement plan would be a retail customer for purposes of Regulation Best Interest. 656 Proposing Release, supra footnote 5, at Section II. 657 See IAA Letter I (‘‘Institutional trusts such as employee benefit or pension plans . . . would not benefit from a Form CRS’’); T. Rowe Letter (‘‘. . . where a plan fiduciary selects a broker-dealer or adviser to provide such services to its plan participants . . . we do not think Form CRS should apply. ERISA and governmental plans are already subject to extensive disclosures to participants and rules related to conflicts. Consequently, a Form CRS in this context would be duplicative of existing disclosures and cause potential confusion, without providing any additional benefits’’); see also Comment Letter of the American Retirement Association (Aug. 3, 2018) (professional investment experts retained by a plan to perform investment advisory services in a fiduciary capacity should not be included); Fidelity Letter (‘‘establish a uniform definition . . . [that] excludes ERISA and nonERISA employer sponsored retirement plans regardless of size, as well as their sponsors, trustees and advisers . . .’’); ICI Letter (a retail investor should not include retirement plans, their sponsors or trustees or plan fiduciaries); NAGDA Letter E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 commenters argued that workplace retirement plans and their representatives should receive Form CRS.658 We understand that plan representatives of workplace retirement plans typically are not seeking or receiving services primarily for personal, family or household purposes when they consider whether to engage a broker-dealer or investment adviser to provide services to a retirement plan established, maintained and operated by an employer to provide pension or retirement savings benefits to employees. Further, the relationship summary—designed to provide succinct information relevant to individual retail investors—is not designed to facilitate account and firm choices by the representatives of these workplace retirement plans. In this regard, we understand that plan representatives typically seek brokerage and advisory services bundled together with, or that will be complimentary with, other services supporting the plan’s establishment, maintenance and operation, such as plan design, recordkeeping and other administrative services, and compliance services to meet applicable requirements under the Internal Revenue Code and ERISA (or applicable state law for non-ERISA governmental plans).659 Accordingly, the final definition of retail investor does not include most workplace retirement plans or their plan representatives seeking services for a plan established, maintained and operated by an employer to provide pension or retirement savings benefits to employees, because such plans and their representatives are not seeking services primarily for personal, family or household purposes. We note, however, that some plan representatives may participate under their employer’s workplace plan, e.g., in the case of a workplace IRA or other workplace retirement plan is established and maintained by a sole proprietor or other self-employed individual that includes one or more employees in addition to the plan representative. If a plan representative who decides the services arrangements for a workplace retirement (requesting clarification); Prudential Letter (‘‘‘retail investor’ for purposes of Form CRS should not include retirement plan representatives’’); Transamerica Letter (same). 658 See Comment Letter of Fisher Investments (Dec. 13, 2018) (‘‘many individuals overseeing retirement plans . . . would benefit from a better understanding of concepts in proposed Form CRS’’); Trailhead Consulting Letter. 659 See, e.g., Groom Law Letter (describing business models of firms offering brokerage and advice services to plans together with other services); SPARK Letter (same). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 plan is a sole proprietor or other selfemployed individual who will participate in the plan, the plan representative also would be a retail investor seeking services for personal, family or household purposes and must receive a copy of the firm’s relationship summary.660 2. Filing Requirements As proposed, all broker-dealers and investment advisers will file their relationship summaries with the Commission, and the relationship summaries will be accessible via the Commission’s public website, Investor.gov,661 in addition to each firm’s website. There are several reasons we are requiring the relationship summaries to be filed with the Commission. First, the public will benefit by being able to access any firm’s relationship summary by using one website, Investor.gov. This should make it easier to make comparisons across firms. Second, some firms may not maintain a website, and therefore their relationship summaries will not otherwise be accessible to the public. Third, by having firms file their relationship summaries with the Commission, Commission staff can more easily monitor the filings for compliance. Commenters generally supported requiring broker-dealers and investment advisers to file their relationship summaries with the Commission.662 We are requiring that the filing be in a text-searchable format, as proposed, and in addition, the final instructions will require that the filing be structured with machine-readable headings. Two commenters advocated that the relationship summary should be filed not only in a text-searchable, but also 660 This is consistent with the final definition of retail customer for purposes of Regulation Best Interest, which to the extent that the plan representative who decides services arrangements is a sole proprietor or other self-employed individual who will participate in the plan, the plan representative will be a retail customer for purposes of Regulation Best Interest to the extent that the plan representative receives recommendations directly from a broker-dealer primarily for personal, family or household purposes. See Regulation Best Interest Release, supra footnote 47, at Section II.B.3a. 661 For broker-dealers, relationship summaries will be filed through Web CRD®, and for investment advisers, relationship summaries will be filed through IARD. Investors will be able to access relationship summaries using BrokerCheck and IAPD, the public interfaces of Web CRD® and IARD, respectively, and through the Commission’s Investor.gov website, which has a search tool that links to both BrokerCheck and IAPD. 662 See, e.g., CFA Letter I; Schnase Letter; Trailhead Consulting Letter; Institute for Portfolio Alternatives Letter. PO 00000 Frm 00229 Fmt 4701 Sfmt 4700 33545 machine-readable, format,663 in response to our solicitation for comment on filing formats. Both commenters stated that this would allow third parties to develop online comparison tools, making it easier for retail investors to compare firms with one another, including across key categories, such as fees.664 We agree that requiring this formatting will enable investors and other data users, industry participants, and the Commission and Commission staff to better collect and analyze reported information and facilitate the development of tools to aggregate and compare the information. We are requiring that only the headings be machine-readable, given that firms will use their own wording in the narrative responses for each of the relationship summary items, and the responses will not be uniform. The machine-readable, structured headings could, for example, be implemented in PDF by creating a bookmark for each of the headings of the relationship summary that matches the text of the heading and that has the heading as its destination. We believe this promotes aggregation and comparison of responses to specific items across different relationship summaries but also limits the costs of preparing the relationship summary. This is consistent with the Commission’s ongoing efforts to modernize our forms by taking advantage of technological advances both in the manner in which information is reported to the Commission and how it is provided to investors and other users.665 These 663 See CFA Letter I (‘‘[P]ast experience regarding investors’ limited use of existing databases, such as IARD and BrokerCheck, cautions against placing too much reliance on investors’ accessing the documents directly. We therefore urge the Commission to require that the documents be filed, not just in a text-searchable format, but in a machine-readable format.’’); Schnase Letter (‘‘[T]he data contained in the Relationship Summary should be required to be filed in a structured data format, so the document can be utilized as a stand-alone human-readable document and serve as the source for a machine-readable data set.’’). 664 CFA Letter I (‘‘We can envision a time when third parties could develop online tools to help investors search for a firm or account that meets their preferred parameters, much like the tools Kelly Blue Book or Edmunds provide to help car buyers narrow their selections.’’); Schnase Letter (‘‘Retail investors may not be able or inclined to build their own algorithms and spreadsheets to manipulate machine-readable data themselves, but third-party providers will likely step in when demand exists to provide investors publicly accessible comparison tools fueled by the machinereadable data made available by the SEC.’’). 665 See, e.g., Inline XBRL Filing of Tagged Data, Advisers Act Release No. 10514 (Jun. 28, 2018) [83 FR 40846] (Aug. 16, 2018); Optional internet Availability of Investment Company Shareholder Reports, Investment Company Act Release No. 33115 (Jun. 5, 2018) [83 FR 29158] (Jun. 22, 2018) E:\FR\FM\12JYR2.SGM Continued 12JYR2 33546 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 instructions are not intended to require firms to prepare a relationship summary in paper format. A firm that prepares and delivers a relationship summary only in an electronic format could, for example, file a rendering of the electronic disclosures with the Commission. In a change from the proposal, brokerdealers will file through Web CRD® instead of EDGAR. Investment advisers will file their relationship summaries through IARD in the same manner as they currently file Form ADV Parts 1A and 2A, as proposed.666 Whether dual registrants prepare a single relationship summary or two, they will file their relationship summaries using both IARD and Web CRD®.667 We are requiring filing of the relationship summary through Web CRD® and IARD because they are currently used by and familiar to broker-dealers and investment advisers, respectively. This should minimize the systems changes firms would need to make, because they would not need to establish new systems in order to file their relationship summaries with the Commission. One commenter supported using EDGAR for analyzing and comparing fee information.668 Several commenters, however, generally preferred Web CRD®, arguing that Web CRD® is more accessible for brokerdealers, which already make filings through Web CRD®, and that Web CRD® data provided on BrokerCheck is more familiar to retail investors.669 In light of (‘‘Shareholder Reports Release’’); Investment Company Reporting Modernization, Investment Company Act Release No. 32314 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 2017)]. 666 General Instruction 7.A.(i) to Form CRS. Several commenters supported using IARD as the filing system for investment advisers. See, e.g., Trailhead Consulting Letter; Schnase Letter. 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. 667 General Instruction 7.A.(i) to Form CRS. Information for investment advisers on how to file with IARD is available on the SEC’s website at www.sec.gov/iard. Information for broker-dealers on how to file through Web CRD® is available on FINRA’s website at https://www.finra.org/industry/ web-crd/web-crd-system-links. See General Instruction 7.A.(ii) to Form CRS. 668 See Morningstar Letter (advocating for fee information to be filed in a standard table with brief examples ‘‘in the EDGAR system in a standardized data format facilitating analysis and comparison’’). 669 See Schnase Letter (‘‘[I]t is not clear why BDs should be filing their Relationship Summary through a different filing system than IAs (IARD, which is operated by FINRA) and through a different filing system than BDs already use for Form BD (CRD, also operated by FINRA).’’); NASAA Letter (‘‘[B]roker-dealers should file Form CRS on the WebCRD platform maintained by FINRA for its BrokerCheck reports (and which is related to IARD).’’); Institute for Portfolio Alternatives Letter (‘‘CRD and its public-facing VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 comments, we have determined that requiring broker-dealers to file their relationship summaries through Web CRD® should streamline broker-dealer filing requirements relative to requiring broker-dealers to file on EDGAR. Brokerdealers already use Web CRD® for filing their own registration records and those of their associated persons, and retail investors already can find brokerdealers’ disciplinary history and other information on BrokerCheck. In addition, Investor.gov already has a prominent search tool on its main landing page that links to BrokerCheck and IAPD, which investors can use to search for information about firms and financial professionals. This minimizes the implementation changes needed to make relationship summaries easily accessible through Investor.gov because new search tools would not need to be created and existing search tools could be linked to the Investor.gov/CRS web page referenced in the relationship summary. We also received comment that dual registrants should file only on one system, instead of on both EDGAR and IARD as proposed.670 One commenter, however, implicitly supported the requirement that dual registrants file on two systems.671 The final instructions require dual registrants to file their relationship summaries using both systems—Web CRD® and IARD.672 This approach ensures a complete and consistent filing record for each firm and facilitates the Commission’s data analysis, examinations, and other regulatory efforts. Firms offering brokerage or investment advisory services through affiliates will follow the same filing requirements as standalone firms. For investment advisers, we are also adopting clarifications in the General Instructions to Form ADV that relate to the amending and filing of the relationship summary.673 First, investment advisers may file an amended relationship summary as an other-than-annual amendment or by including the relationship summary as BrokerCheck is a system familiar to both the brokerage industry as well as investors. We believe that CRD/BrokerCheck will address potential investor confusion and streamline broker requirements.’’). 670 See, e.g., Prudential Letter (‘‘The Commission should clarify that a single filing [for dual registrants], in either IARD or EDGAR, would constitute compliance with the filing requirement.’’). 671 See Schwab Letter III (providing sample Form CRS instructions for dual registrants to file on IARD and EDGAR). 672 General Instruction 7.A.(i) to Form CRS. 673 See infra Section II.C.4 generally for a discussion of amendments to the relationship summary. PO 00000 Frm 00230 Fmt 4701 Sfmt 4700 part of an annual updating amendment, within the 30 days in which they are required to file the amendment.674 Second, the instructions provide that advisers may, but are not required to, submit amended versions of their relationship summary as part of their annual updating amendment and include additional technical references to implement this instruction.675 Third, we added provisions to mirror the requirements of the General Instructions to Form CRS as to when amendments and exhibits showing changes to Part 3 must be made and filed.676 We believe that investment advisers will benefit from these clarifications. Finally, we are adopting certain amendments to the General Instructions to Form ADV to add conforming technical changes and references to the Form ADV, Part 3.677 3. Delivery Requirements a. Form of Delivery The final instructions provide, as proposed, that firms will be able to deliver the relationship summary (including updates) within the framework of the Commission’s existing guidance regarding electronic delivery.678 This framework consists of 674 See amended General Instruction 4 to Form ADV (revised to add the following language: ‘‘If you are registered with the SEC, you must amend Part 3 of your Form ADV within 30 days whenever any information in your relationship summary becomes materially inaccurate by filing with the SEC an additional other-than-annual amendment or by including the relationship summary as part of an annual updating amendment.’’). Compare Proposed General Instruction 4 to Form ADV (‘‘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.’’). 675 See amended General Instruction 4 to Form ADV (revised with language that investment advisers must update responses to all items ‘‘in Part 1A, 1B, 2A and 2B (as applicable),’’ and ‘‘You may, but are not required, to submit amended versions of the relationship summary required by Part 3 as part of your annual updating amendment.’’). 676 See infra footnotes 769–774, 781–783, and accompanying text. 677 See amended General Instruction 3 to Form ADV (indicating that Form ADV, as amended to add Part 3, now contains five instead of four parts); amended General Instruction 4 to Form ADV (‘‘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 accordance with the requirements of Part 3 of Form ADV. See Advisers Act Rule 203– 1.’’); amended General Instruction SEC’s Collection of Information section (removing ‘‘promptly’’ to reflect filing requirements for relationship summary changes). 678 See Use of Electronic Media by BrokerDealers, Transfer Agents, and Investment Advisers for Delivery of Information; Additional Examples E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 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.679 In the Proposing Release, we also provided proposed guidance that 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, and that this method of initial delivery for the relationship summary would be consistent with the Commission’s electronic delivery guidance.680 We have included this provision in the final instructions to provide additional clarity and certainty on what is permissible for initial delivery of the relationship summary.681 This approach applies only to the initial delivery of the relationship summary to new or prospective clients or customers, and not to any other delivery obligation of any other required disclosure. With respect to existing clients or customers, as proposed, 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’s electronic delivery guidance. The above delivery instructions are based on the assumption that retail investors are able to access and prefer to receive communications and disclosures 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’’). Recognizing the growth of different forms of electronic media, other technological developments, and the passage of time since these releases were issued, the Commission plans to revisit its existing guidance regarding electronic delivery. 679 96 Guidance, supra footnote 678. 680 See Proposing Release, supra footnote 5, at nn.344–45 and accompanying text; see also 2000 Guidance, supra footnote 678, at 65 FR 25845–46; 96 Guidance, supra footnote 678, at 61 FR 24647; and 95 Guidance, supra footnote 678, at 60 FR 53461. 681 General Instruction 9.B. to Form CRS (‘‘You may 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 you or your financial professional.’’). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 through the same medium in which they request information from the firm or financial professional. If this assumption is not correct, retail investors can request a copy of the relationship summary in a format they prefer, as discussed below, and can establish their delivery preferences with the firm once they have entered into a relationship. Numerous commenters expressed support for electronic delivery, including for modifications to the instructions to make electronic delivery a more accessible option for the relationship summary as well as other disclosures.682 A number of commenters further advocated for the ‘‘notice plus access’’ model, in which posting the relationship summary to the firm’s website, in combination with a notice to the retail investor that the relationship summary is available there, would constitute delivery.683 Some of these commenters argued that this approach should suffice for delivery, even if the retail investor had not previously consented to electronic delivery in an affirmative way.684 A few commenters cited to the Commission’s recently adopted rule 30e–3 under the Investment Company Act 685 as a possible model for delivering the relationship summary.686 Some of these 682 See, e.g., CFA Institute Letter I (‘‘Whatever design is finalized for CRS, it should accommodate electronic delivery to investors. We also believe a design with interactive components is needed in today’s electronically savvy investor base.’’); TIAA Letter (‘‘the SEC could make the disclosure requirements in . . . Form CRS more flexible, such that broker-dealers have more options with respect to the method of delivery of required disclosures. . . .’’); MassMutual Letter; SIFMA Letter; SPARK Letter; Morgan Stanley Letter; Cetera Letter II; Fidelity Letter. 683 See, e.g., Primerica Letter; Cetera Letter II; Schwab Letter (advocating a notice plus access model for annual or more frequent updates to the relationship summary); Pickard Djinis and Pisarri Letter; IAA Letter I; SIFMA Letter; MassMutual Letter; Comment Letter of the Money Management Institute (Aug. 7, 2018) (‘‘MMI Letter’’); Wells Fargo Letter. 684 See, e.g., LPL Financial Letter (supporting an implicit consent model on the basis that, among other things ‘‘It simply is not feasible to obtain an investor’s affirmative consent to electronic delivery before the investor makes a final decision about the [investment relationship]’’); FSI Letter I (supporting a negative consent model, rather than an opt-in approach); IAA Letter I (supporting an implied consent model). 685 17 CFR 270.30e–3 (internet availability of reports to shareholders); Shareholder Reports Release, supra footnote 665. 686 See, e.g., T. Rowe Letter (‘‘In cases where no email address is on file with the firm, we think a notice and access protocol akin to Rule 30e–3 is appropriate.’’); SPARK Letter (‘‘The SEC has recently demonstrated a willingness to embrace electronic disclosure as the default delivery method for other disclosures and we encourage the SEC to consider whether the disclosures added by the SEC’s Proposal, including Form CRS, should be able to tap into the benefits of electronic delivery.’’). PO 00000 Frm 00231 Fmt 4701 Sfmt 4700 33547 commenters also advocated for a more comprehensive updating of the Commission’s guidance concerning electronic delivery, not just for the relationship summary but for other disclosures as well.687 Commenters advocating for more widespread use of electronic delivery cited to arguments including the potential cost savings and improved security of delivery to investors.688 On the other hand, some commenters expressed reservations about a notice plus access equals delivery approach and supported the Commission’s proposed approach.689 The RAND 2018 survey and another investor survey also showed mixed results relating to electronic delivery, with many participants indicating that they would prefer to receive the disclosures in paper.690 Similarly, the IAC has stated that nearly half of investors (49%) still prefer to receive paper disclosures through the mail, compared with only 33% who prefer to receive disclosures electronically, either through email (27%) or by accessing them online (6%).691 Additionally, we are aware, 687 See, e.g., LPL Financial Letter (‘‘Modern communication practices underscore the need for the Commission to provide more flexibility to broker-dealers and investment advisers to satisfy their document delivery obligations by delivering materials to customers and clients who have implicitly consented to electronic delivery as well as to current customers and clients who have affirmatively consented to electronic delivery in a manner contemplated by the existing guidance.’’); SPARK Letter (‘‘strongly urges the SEC to permit . . . electronic delivery as the default delivery method for satisfying the disclosure requirements under [Regulation Best Interest, as well as Form CRS].’’); Cetera Letter II (‘‘We believe that adoption of Reg. BI and the Form CRS represents something of a watershed moment. . . .’’); Pickard Djinis and Pisarri Letter; IAA Letter I; MMI Letter. 688 See, e.g., Cetera Letter II (asserting that electronic delivery is safer and more environmentally friendly); IRI Letter; SPARK Letter; Primerica Letter. 689 CFA Letter I (‘‘We greatly appreciate that, in discussing this issue, the Release specifically references the obligation to provide ‘evidence to show delivery.’ This should help to clarify that firms could not meet the disclosure requirement simply by making the disclosures accessible on a public website and providing notice of their availability, under an ‘access equals delivery’ model. . . .’’); AARP Letter (‘‘The SEC should prohibit advisers from simply providing an electronic address for disclosures. . . . A paper copy should be provided to the retail investor.’’). 690 See supra footnote 699. 691 IAC Electronic Delivery Recommendation, supra footnote 153 (citing FINRA Investor Education Foundation, Investors in the United States 2016 (Dec. 2016), available at https:// www.usfinancialcapability.org/downloads/NFCS_ 2015_Inv_Survey_Full_Report.pdf). While the FINRA 2016 Investors Study was conducted prior to the Form CRS proposal (and does not specify what disclosure materials are contemplated in the survey, e.g., shareholder reports, summary prospectuses, statutory prospectuses, account E:\FR\FM\12JYR2.SGM Continued 12JYR2 33548 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 based on our filing data, that a number of firms do not host public websites and would not be able to make available an updated, electronic version of their relationship summary for their retail investors at all times.692 Some commenters noted that some retail investors may lack readily available internet access.693 The relationship summary is designed to be delivered when a retail investor selects a firm or financial professional and which services to receive, including updated versions upon certain events when retail investors are again making decisions about whether to invest through an advisory account or a brokerage account. These selections affect all of the retail investor’s subsequent investments under that relationship. In comparison, documents such as shareholder reports and prospectuses typically relate to investment decisions on single products; once the product is purchased, reporting is most commonly delivered at regular intervals, unlike the relationship summary. We are preserving an investor’s ability to receive the relationship summary in paper, by maintaining the protections provided by the Commission’s electronic delivery guidance.694 We recognize the benefits to retail investors of receiving the relationship summary as early as possible when considering a firm or financial professional and that electronic communication can facilitate earlier delivery, provided that retail investors can readily access the form of communication used. As noted above, we have adopted the instruction that delivery of the relationship summary to new or prospective clients or customers in a manner that is consistent with how that retail investor requested information about the firm or financial professional would be consistent with the Commission’s electronic delivery statements, etc.), it presents general investor survey data regarding investor disclosure preferences. 692 Based on IARD system data, 8.4% of investment advisers with individual clients do not report at least one public website. 693 See, e.g., Comment Letter of C. Frederick Reish (Sept. 12, 2018); SIFMA Letter (acknowledging that firms would need to provide linked disclosures to customers and prospective customers who do not have internet access); LPL Financial Letter (citing Investment Company Institute, 2015 Investment Company Fact Book, (55th ed. 2015), at 129, available at https://www.ici.org/pdf/2015_ factbook.pdf. The study found the following with respect to internet access in mutual fund owning households: (i) Head of household age 65 or older, 14% lack access; (ii) education level of high school diploma or less, 16% lack access; and (iii) household income of less than $50,000, 16% lack access.). 694 See supra footnote 678. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 guidance.695 This approach applies only to the initial delivery of the relationship summary to new or prospective clients or customers, and not to any other delivery obligation of any other required disclosure. Moreover, to ensure that a relationship summary delivered electronically is noticeable for retail investors and not hidden among other disclosures, we are adopting a new instruction that a relationship summary delivered electronically must be presented prominently in the electronic medium and must be easily accessible for retail investors.696 For example, a firm can use a direct link or provide the relationship summary in the body of an email or message.697 We are also requiring firms to post the current version of the relationship summary prominently on their public website, if they have one, as proposed.698 We understand that, while many investors prefer receiving disclosures about investment advice in electronic format, many also value the option to receive them in paper.699 We are adopting several additional requirements relating to relationship summaries in paper format. First, in a relationship summary that is delivered in paper format, firms may link to additional information by including URL addresses, QR codes, or other means of facilitating access to such information.700 Second, if a relationship summary is delivered in paper format as part of a package of documents, the firm must ensure that the relationship summary is the first among any documents that are delivered at that time, substantially as proposed.701 All 695 See Proposing Release, supra footnote 5, at nn.344–45 and accompanying text; see also 2000 Guidance, supra footnote 678, at 65 FR 25845–46; 96 Guidance, supra footnote 678, at 61 FR 24647; and 95 Guidance, supra footnote 678, at 60 FR 53461. 696 General Instruction 10.C. to Form CRS. 697 General Instruction 10.C. to Form CRS. 698 Advisers Act rule 204–5(b)(3) and Exchange Act rule 17a–14(c)(3); General Instruction 10.A. to Form CRS. The most recent versions of firms’ relationship summaries will be accessible through Investor.gov. Firms will be required to include in their relationship summaries a phone number where investors can request up-to-date information and (if applicable) request a copy of the relationship summary. See Item 5.B. of Form CRS. Firms also could include their relationship summaries on other electronic media, such as mobile apps and other similar technologies. 699 See RAND 2018, supra footnote 13 (when surveyed about how and when they would prefer to receive the relationship summary, ‘‘two-fifths reported that they would be most likely to view a paper document’’); Schwab Letter I (Koski) supra footnote 21 (26% of survey participants preferred to receive disclosures about investment advice on paper; 46% preferred online or digital disclosures with the option for paper). 700 General Instruction 3.B. to Form CRS. 701 General Instruction 10.D. to Form CRS. Cf. Proposed General Instruction 8.(c) to Form CRS (‘‘If PO 00000 Frm 00232 Fmt 4701 Sfmt 4700 firms will be required to make a copy of the relationship summary available upon request without charge.702 However, we are not requiring that firms make the relationship summary available in paper format. We understand that some firms’ business models—for example, those of advisers providing automated investment advisory services and broker-dealers that provide services only online—are based on delivering substantially all disclosures and conducting substantially all correspondence with clients and customers electronically. We do not intend to change these practices and believe that retail investors that prefer paper communications will have the opportunity to establish relationships with firms that accommodate paper delivery. b. Initial Delivery The final instructions require an investment adviser registered with the SEC to deliver a relationship summary to each retail investor before or at the time the firm enters into an investment advisory contract, even if the agreement is oral, as proposed.703 The timing for standalone investment advisers to deliver the relationship summary to new or prospective retail clients generally tracks the initial delivery requirement for Form ADV Part 2A.704 As described further below, we are changing the instruction for brokerdealers to require delivery before or at earliest of one of three triggers.705 In the relationship summary is delivered on paper and not as a standalone document, you must ensure that the relationship summary is the first among any documents that are delivered at that time.’’). 702 General Instructions 1.C. to Form CRS. 703 General Instruction 7.B.(i) to Form CRS. The final instructions for investment advisers are streamlined from the proposal, but remain substantively the same. Compare to Proposed Advisers Act rule 204–5(b)(1) and Proposed General Instruction 5.(b) to Form CRS (‘‘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 Advisers Act rule 204–5(b)(1) and Exchange Act rule 17a–14(c)(1). You must deliver the relationship summary even if your agreement with the retail investor is oral.’’). We replaced the word ‘‘agreement’’ with ‘‘contract’’ to mirror the wording in the current Advisers Act rules and Form ADV instructions. See, e.g., Item 5.D of Part 2.A. of Form ADV. We also clarified that the delivery requirements apply to investment advisers registered with the SEC. 704 See General Instruction 1 to Part 2A of Form ADV. 705 General Instruction 7.B.(ii) to Form CRS (‘‘If you are a broker-dealer, you must deliver a relationship summary to each retail investor, before or at the earliest of: (i) A recommendation of an account type, a securities transaction, or an investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) the opening E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 comparison, under the proposal, brokerdealers would have delivered the relationship summary before or at the time the retail investor first engages their services.706 Under the final rules, dual registrants, and affiliated brokerdealers and investment advisers that jointly offer their services to retail investors, must deliver at the earlier of the initial delivery triggers for an investment adviser or a broker-dealer, including a recommendation of account type.707 This applies whether the dual registrant or affiliated firms prepare one single relationship summary describing both brokerage and investment advisory services, or two separate relationship summaries describing each type of service. Some commenters supported keeping the initial delivery requirements as proposed.708 Other commenters expressed concern that under the proposal, the relationship summary would be delivered only after the investor has already made a decision about which firm to engage and which type of account to open, and recommended variations on the proposed initial delivery requirements, including mandating even earlier delivery.709 The variations include, for of a brokerage account for the retail investor.’’). As described below, dual registrants will continue to deliver the relationship summary at the earlier of the requirements for investment advisers or brokerdealers. General Instruction 7.B.(iii) to Form CRS (‘‘A dual registrant must deliver the relationship summary at the earlier of the timing requirements in General Instruction 7.B.(i) or (ii).’’). 706 See Proposed Exchange Act rule 17a–14(c)(1); Proposed General Instruction 5.(b) to Form CRS. 707 General Instruction 7.B.(iii) to Form CRS (‘‘A dual registrant must deliver the relationship summary at the earlier of the timing requirements in General Instruction 7.B.(i) or (ii).’’). 708 See, e.g., Trailhead Consulting Letter; Schnase Letter (agreeing that the relationship summary should be required to be delivered along the lines proposed in the Proposing Release); SIFMA Letter (‘‘For the initial delivery most brokerage firms likely will include [the relationship summary] with account applications or other account opening materials, while investment advisers will include it with their Form ADV.’’). 709 See, e.g., CFA Letter I; CFA Institute Letter I; AARP Letter; NASAA Letter; Consumers Union Letter; Consumer Reports Letter. In the RAND 2018 survey, supra footnote 13, 70% of respondents reported that they would prefer to receive the relationship summary at the outset of the relationship, i.e., ‘‘before or at the time you first engage the investment professional’’ and slightly more than 30% of respondents would prefer to receive the relationship summary ‘‘before the investment professional first recommends a transaction or investment strategy’’; see also Schwab Letter I (Koski), supra footnote 21 (when asked ‘‘[w]hich of the following best describes your preference for when you would like to receive information about how a Brokerage Firm or a Registered Investment Adviser (RIA) does business with you?’’, 41% preferred ‘‘[a]t or before I open my account, plus any updates on an annual basis,’’ 22% preferred ‘‘[a]vailable on an ongoing basis, such as on a firm’s website,’’ 19% preferred at ‘‘[a]t VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 example, delivery at the point of first contact or inquiry between the retail investor and firm, whenever possible; 710 at the earlier of when a customer contacts the firm or enters into an advisory agreement or engagement of services; 711 and upon the first interaction with a prospective retail investor.712 For dual registrants, one commenter recommended requiring delivery no later than the point at which a recommendation is made regarding which type of account to open.713 One commenter asserted that the Commission should not permit delivery ‘‘at’’ the time of service but rather should always require delivery ‘‘before’’ the provision of service.714 The IAC recommended providing ‘‘a uniform, plain English disclosure document . . . to customers and potential customers of broker-dealers and investment advisers at the start of the engagement, and periodically thereafter.’’ 715 A few commenters supported requiring a period of time between delivery of the relationship summary and the beginning of the relationship.716 One commenter suggested allowing time for retail investors to review the relationship summary, subsequent to delivery when the firm first interacts with a retail investor.717 A number of investors at Commission-held roundtables also supported a waiting period.718 Other commenters, however, opposed a mandated delay between delivery of the relationship summary and engaging in services.719 Various commenters explained logistical and recordkeeping issues if firms were required to deliver the relationship summary at first contact or or before I open my account only,’’ and 17% preferred ‘‘[e]very single time I receive investment advice.’’). 710 See CFA Letter I. 711 See CFA Institute Letter I. 712 See AARP Letter. 713 See CFA Letter I. 714 See NASAA Letter. 715 See IAC Broker-Dealer Fiduciary Duty Recommendations, supra footnote 10. 716 See, e.g., AARP Letter; CFA Institute Letter I; NASAA Letter. 717 See AARP Letter. 718 See, e.g., Houston Roundtable, at 51 (one investor suggesting a ‘‘cool-off period’’); Washington, DC Roundtable, at 58 (at least two investors supporting a ‘‘lapse’’ of time between receipt of a relationship summary and having to sign it). 719 Comment Letter of John Neil Conkle (Aug. 7, 2018) (arguing that a waiting period is not necessary for the relationship summary to fulfill its purpose); Edward Jones Letter (arguing that a waiting period could harm investors by preventing them from meeting IRA contribution or rollover deadlines, for example, or at a minimum cause frustration); SIFMA Letter (arguing that the relationship summary is designed to be contemporaneously read and understood). PO 00000 Frm 00233 Fmt 4701 Sfmt 4700 33549 prior to engaging a firm’s services.720 For example, one commenter stated that it would not be feasible to obtain an investor’s affirmative consent to electronic delivery before the investor decides to engage the firm.721 Tracking whether or not prospective customers had consented to electronic delivery of the relationship summary would be difficult because prospective customers who do not open accounts would not have account numbers or other unique identifiers for the firm’s recordkeeping purposes.722 Other commenters argued that keeping records of when a relationship summary was given to a prospective retail investor would be unnecessarily burdensome for firms and would likely provide de minimis benefits.723 Still other commenters discussed the difficulty of defining when a customer first engages the firm’s services, the terminology used in the proposal.724 We encourage investment advisers and broker-dealers to deliver the relationship summary far enough in advance of a prospective retail investor’s final decision to engage the firm to allow for meaningful discussion between the financial professional and retail investor, including by using the conversation starters, so that the retail investor has time to understand the relationship summary and to weigh available options. We believe that prospective clients or customers would benefit from receiving the relationship summary as early as possible when deciding whether to engage the services of a firm or financial professional. In response to comments on initial delivery, including those relating specifically to broker-dealers, we are modifying the broker-dealer initial delivery requirements, as discussed below. However, we are declining to mandate a delivery requirement based on first contact or inquiry, or to impose a waiting period. First, ‘‘first contact or inquiry’’ may include circumstances that are not limited to the seeking of investment services, such as business 720 See, e.g., Edward Jones Letter (asserting that requiring firms to record the delivery of the relationship summary to prospective clients that subsequently become clients would impose a significant burden without providing meaningful benefits to investors); SIFMA Letter (‘‘[I]t would be very burdensome and not practical in many instances to keep track of Forms CRS that are provided to retail investors who never seek to establish a relationship with a firm.’’); Primerica Letter; LPL Financial Letter. 721 See LPL Financial Letter. 722 See LPL Financial Letter. 723 See infra footnote 803; see also infra footnotes 798–816 and accompanying text regarding recordkeeping requirements. 724 See, e.g., Fidelity Letter; SIFMA Letter; Primerica Letter; TIAA Letter. E:\FR\FM\12JYR2.SGM 12JYR2 33550 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 interactions for other purposes or social interactions, and therefore could create compliance uncertainty. Second, we believe the availability of each firm’s relationship summary through Investor.gov and on its own website, if the firm has one, helps to address the concern that investors will not have the opportunity to review and compare relationship summaries before entering into an investment advisory contract or receiving services from a brokerdealer.725 Third, some investors may not want to wait to begin services,726 and those who do can always take as much time as needed to review the relationship summary and wait to sign an advisory agreement or begin receiving brokerage services at a later time. Fourth, firms will be permitted to deliver the relationship summary well before they enter into an advisory agreement or provide brokerage services, and as noted, we encourage firms to deliver the relationship summary early in the process. Finally, dual registrants, and affiliated brokerdealers and investment advisers that jointly offer their services to retail investors, must deliver their relationship summaries at the earlier of the delivery triggers for broker-dealers or investment advisers. To the extent the initial delivery requirements for a broker-dealer are earlier than the delivery requirements would be for an investment adviser, the earlier requirements will apply to an investment adviser that is a dual registrant or that offers services jointly with a broker-dealer affiliate. We believe this will provide a significant benefit to retail investors, given the substantial percentage of regulatory assets under management (‘‘RAUM’’) managed by dual registrants and investment advisers with broker-dealer affiliates, relative to the total RAUM managed by investment advisers overall.727 725 See CFA Institute Letter I (‘‘We strongly support the requirement that firms with public websites must post their CRSs on their sites in an easily accessible location and format. . . . Investors can review the disclosures provided there before deciding on a service provider and showing up for a meeting. Then when presented with the CRS ‘before or at the time’ of entering into an agreement or engaging a firm’s services, an investor will have already had an opportunity to review the disclosures and come armed with questions.’’). 726 See, e.g., Edward Jones Letter (stating that some investors have a very specific timeframe for opening a new account, such as meeting an IRA contribution or rollover deadline); SIFMA Letter (stating that requiring a waiting period would frustrate a retail customer’s efforts to begin his or her relationship with a financial services provider). 727 As of December 31, 2018, 1,878 SEC-registered investment advisers report in their Form ADV an affiliate that is a broker-dealer also registered with the SEC. These 1,878 SEC-registered investment advisers manage approximately $58.48 trillion, or VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 To facilitate earlier delivery, as discussed above, the final instructions allow firms to deliver the relationship summary to a new or prospective client or customer in a manner that is consistent with how the retail investor requested information about the firm or financial professional, clarifying that this approach would be consistent with the SEC’s electronic delivery guidance.728 We believe this approach alleviates concerns expressed by commenters that obtaining the consent of prospective clients or customers to receive electronic delivery and maintaining records of that consent would be challenging.729 While we recognize recordkeeping burdens relating to the delivery of the relationship summary to prospective clients—for example, we are not imposing a delivery requirement upon first contact or inquiry by a retail investor, as discussed above—we disagree that they are insurmountable and would outweigh the benefits to retail investors. As discussed further in Section II.E. below, investment advisers and broker-dealers have experience with similar recordkeeping requirements.730 Moreover, we believe there is considerable benefit to retail investors in receiving the relationship summary before deciding to engage a firm, to allow time for questions and discussion with the financial professional, to understand the relationship summary, and to weigh available options. Commenters suggested modifications to the proposed initial delivery requirements specifically for brokerdealers. Several commenters requested that we require broker-dealers to deliver the relationship summary at the point of first contact, inquiry, or interaction with a retail investor.731 A number of commenters also raised questions about the meaning of ‘‘engaging the services’’ of a broker-dealer, noting that it was unclear when that may ultimately occur and that it is a new and undefined concept in the context of a customer approximately 70% of total RAUM managed by SEC-registered investment advisers. Furthermore, 359 SEC-registered investment advisers that are also dually-registered as broker-dealers manage approximately $5.18 trillion, or 6.12% of total RAUM. Thus, SEC-registered investment advisers that report registered broker-dealer affiliates and dual registrants together manage over 75% of RAUM. See also infra footnotes 855, 888–889, and accompanying text. 728 General Instruction 10.B. to Form CRS. 729 See supra footnotes 720–722 and accompanying text. 730 See infra footnotes 809–810 and accompanying text. 731 See CFA Institute Letter I; AARP Letter; and NASAA Letter. PO 00000 Frm 00234 Fmt 4701 Sfmt 4700 relationship with a broker-dealer.732 Other commenters suggested that we exclude or exempt certain types of broker-dealers that provide limited services to retail investors from the requirement to deliver the relationship summary or from the requirements of Form CRS more generally.733 In response to these concerns, we are modifying the initial delivery requirements for broker-dealers. Instead of ‘‘at the time the retail investor first engages a broker-dealer’s services,’’ broker-dealers will be required to deliver the relationship summary to each retail investor before or at the earliest of: (i) A recommendation of an account type, a securities transaction, or an investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) the opening of a brokerage account for the retail investor.734 We believe that these more concrete initial delivery triggers for broker-dealers avoid the uncertainty of when a retail investor first engages a broker-dealer’s services and include scenarios that encompass earlier delivery, in response to commenters’ concerns. As noted, the proposal would have required broker-dealers to deliver the relationship summary before or at the time the retail investor first engages the firm’s services. This proposed requirement was 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’’. The proposed rule would not have required delivery to a retail investor to whom a broker-dealer makes a recommendation, if that retail investor did not open or have an account with 732 See Primerica Letter; SIFMA Letter; and Fidelity Letter. 733 See, e.g., Fidelity Letter (recommending ‘‘that the SEC exclude limited-purpose broker-dealers acting solely as mutual fund general distributors from the obligation to deliver Form CRS to direct mutual fund investors that invest on an unsolicited basis, and shareholders investing through an intermediary (such as a full service broker-dealer or bank) that has an independent obligation to deliver such information to its client’’ and suggesting ‘‘that the SEC explicitly exempt from the Form CRS requirement certain categories of broker-dealers, including clearing firms, principal underwriters, and distributors of mutual funds, as these firms do not have a direct relationship with the end investor based on their business models’’); ICI Letter; Wells Fargo Letter; Invesco Letter; ACLI Letter; Comment Letter of Great-West Financial (Aug. 6, 2018); T. Rowe Letter and Oppenheimer Letter. 734 See Exchange Act rule 17a–14(c)(1); General Instruction 6.B.(ii) to Form CRS. E:\FR\FM\12JYR2.SGM 12JYR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations the broker-dealer, or that recommendation did not lead to a transaction with that broker-dealer.735 If the recommendation led to a transaction with the broker-dealer who made the recommendation, the retail investor would have been considered to be ‘‘engaging the services’’ of that brokerdealer at the time the customer places the order or an account is opened, whichever occurred first. Instead, in response to comments advocating for earlier delivery, the final requirement expands on the proposed initial delivery requirement and potentially pushes it earlier, to require delivery (even where a brokerage account has not been established) before or at the time a broker-dealer recommends an account type, a securities transaction, or an investment strategy involving securities without regard to whether the retail investor acts on the recommendation. We believe that revising the delivery requirement in this way will give retail investors the opportunity to consider the information included in the relationship summary earlier in the process of determining whether to establish a brokerage relationship with the broker-dealer, as well as in evaluating the recommendation. Compared to the proposal, the final requirement also pushes earlier the time at which broker-dealers must deliver the relationship summary in instances in which the retail investor does not open an account but still engages in a securities transaction such as the ‘‘check and application’’ example described above. Under these circumstances, broker-dealers must deliver the relationship summary before or at the time an order is placed for the retail investor, instead of before or at the time the transaction is effected, as proposed. This delivery obligation would be triggered to the extent this type of transaction were unsolicited, because, as described above, if a recommendation preceded this type of transaction, delivery would have been triggered before or at the time of the recommendation. To the extent the broker-dealer had not already made a recommendation of an account type, a securities transaction or an investment strategy involving securities, or placed an order for the retail investor, delivery would be triggered before or at the time the retail investor opens a brokerage account with the broker-dealer. As revised, we believe that the initial delivery triggers for broker-dealers avoid the uncertainty of the proposed initial delivery standard and include scenarios that encompass 735 Proposing VerDate Sep<11>2014 Release, supra footnote 5. 19:21 Jul 11, 2019 Jkt 247001 earlier delivery, in response to commenters’ concerns. In response to the comments requesting exemptions or exclusions from the relationship summary obligations generally and the delivery obligations for certain broker-dealers that engage in limited activities, we are clarifying that we do not intend for the Form CRS requirements to apply to certain types of relationships between a broker-dealer and a retail investor. Pursuant to Exchange Act Rule 17a–14, the scope of the Form CRS requirement applies ‘‘to every broker or dealer registered with the Commission pursuant to section 15 of the Act that offers services to a retail investor’’ (emphasis added). Solely for purposes of Form CRS, we are describing here the types of relationships between a brokerdealer and a retail customer that we would not consider to be ‘‘offer[s] [of] services to a retail investor’’. Specifically, clearing and carrying broker-dealers that are solely providing services to third party or affiliated introducing broker-dealers would not be considered to be offering services to a retail investor for purposes of Exchange Act Rule 17a–14, and would not be subject to the Form CRS requirements when acting in such capacity. As described above, the relationship summary is designed to make it easier for retail investors to get the facts they need when deciding among investment firms or financial professionals and the accounts and services available to them. When a retail investor is establishing or has a relationship with an introducing broker-dealer, we believe that the retail investor would benefit most from focusing on that broker-dealer’s services, fees, standard of conduct, conflicts of interest and disciplinary history. In these circumstances, we believe that receiving an additional relationship summary from a clearing or carrying broker-dealer could create confusion and detract from the goals of this disclosure. Additionally, we would not consider a broker-dealer that is serving solely as a principal underwriter to a mutual fund or variable annuity or variable life insurance contract issuer to be offering services to a retail investor for purposes of Exchange Act Rule 17a–14, when acting in such capacity. As with clearing and carrying broker-dealers, brokerdealers serving solely as principal underwriters do not typically establish the kind of relationship with retail investors that Form CRS has been designed to address. To the extent such broker-dealers interact with a retail customer in a different capacity (beyond serving as a principal underwriter to the PO 00000 Frm 00235 Fmt 4701 Sfmt 4700 33551 mutual fund or variable contract that the retail investor owns), we believe the nature of their relationship could become one where delivery of the Relationship Summary would be useful. Accordingly, Form CRS’s obligations would apply in those instances.736 We are adopting as proposed the approach to delivery for dual registrants, whereby they must deliver the relationship summary to a new or prospective retail investor at the earlier of the delivery triggers applicable to investment advisers and brokerdealers.737 One commenter argued that a dual registrant should be required to deliver the relationship summary at the earlier of providing an investment recommendation or the time a retail investor opens an account with the firm.738 We believe that the brokerdealer initial delivery requirements, as adopted, accommodate this comment. Another commenter asserted that dual registrants should be required to deliver the relationship summary no later than when a recommendation is made as to the type of account to open.739 We believe that the final initial delivery requirements accommodate this comment also. Broker-dealers will be required to deliver the relationship summary before or at the earliest of (i) a recommendation of an account type, a securities transaction, or an investment strategy involving securities, (ii) placing an order for the retail investor, or (iii) the opening of a brokerage account for the retail investor.740 Investment advisers will be required to deliver the relationship summary before or at the time of entering into an investment advisory contract with the retail investor.741 Dual registrants will be required to deliver the relationship summary when recommending an account type to the retail investor if it is the earliest occurrence among the initial delivery triggers for brokerdealers and investment advisers, which we believe will typically precede the opening of a brokerage account or 736 For example, we would expect the requirements of Form CRS to apply in the event the broker-dealer makes a recommendation of an account type, securities transaction or investment strategy involving securities, the retail investor places an order for the purchase of different securities, or the retail investor opens a new brokerage account with the broker-dealer. 737 Advisers Act rule 204–5(b)(1) and Exchange Act rule 17a–14(c)(1); see also General Instruction 7.B.(iii) to Form CRS. 738 See State Farm Letter. 739 See CFA Letter I. 740 See Exchange Act rule 17a–14(c)(1); General Instruction 7.B.(ii) to Form CRS. 741 See Advisers Act rule 204–5(b)(1); General Instruction 7.B.(i) to Form CRS. E:\FR\FM\12JYR2.SGM 12JYR2 33552 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 entering into an investment advisory contract.742 c. Additional Delivery Requirements to Existing Clients and Customers We are adopting requirements for firms to re-deliver the relationship summary to existing clients and customers under certain circumstances, with some modifications from the proposal. We continue to believe that these investors will benefit from being reminded of the information contained in the relationship summary, including about the different services and fees that the firm offers, when they are again making decisions about whether to invest through an advisory account or a brokerage account. Specifically, after an initial delivery of the relationship summary to existing clients and customers who are retail investors, firms will be required to deliver the most recent version of the relationship summary to a retail investor if they (i) open a new account that is different from the retail investor’s existing account(s); (ii) recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) recommend or provide a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account, for example, the first time purchase of a direct-sold mutual fund or insurance product that is a security through a ‘‘check and application’’ process, i.e., not held directly within an account. In comparison, as proposed, the instructions would have required a firm to deliver a relationship summary to existing clients or customers when: (i) A new account is opened that is different from the retail investor’s existing account, or (ii) changes are made to the existing account that would materially change the nature and scope of the relationship. The proposed instructions provided that whether a change was material for these purposes would depend on the specific facts and circumstances and gave as examples transfers from an investment advisory account to a brokerage account, transfers from a brokerage account to an investment advisory account, and moves of assets from one type of account to another in a transaction not in the normal, customary or already agreed course of dealing. In the RAND 2018 survey, 50% of respondents reported that they would like to receive an updated relationship 742 See General Instruction 7.B.(iii) to Form CRS. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 summary ‘‘whenever there is a material change in the Relationship Summary, such as a change in fees or commission structure,’’ about 30% would prefer to receive the relationship summary periodically and almost 40% preferred to receive the summary on request.743 One commenter supported the additional delivery requirements to existing clients and customers as proposed, agreeing that investors are again making decisions about relationships and account types under these circumstances and would benefit from the information the relationship summary provides.744 Another commenter recognized the value of delivering the relationship summary to existing clients and customers but recommended specific limitations to the requirements.745 One commenter supported once a year or periodic updates and continued availability of a current version on a firm’s website,746 while another commenter opposed any requirement to provide periodic updates.747 Several commenters argued that some or all of the additional delivery requirements are not necessary, given the prior initial delivery and online availability of relationship summaries.748 A few commenters argued that the additional delivery requirements could confuse investors because of either an apparent duplication or difference from delivery 2018, supra footnote 13. CFA Letter I (‘‘We support this proposal and agree with the Commission that, 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.’ ’’). 745 See SIFMA Letter (arguing that a ‘‘material change’’ should be defined as changes from an advisory account to a brokerage account or vice versa, and not include asset movements from one type of account to another or ‘‘other material changes’’). 746 See Schwab Letter I; Schwab Letter III. 747 See CFN Letter. 748 See, e.g., LPL Financial Letter (‘‘It is not clear what additional benefits obtain from delivering an identical copy of a document an investor has already received.’’); SIFMA Letter (‘‘[W]e do not believe these additional trigger points [other than changing from one type of account to another] are necessary because customers will receive Form CRS at periodic intervals throughout the relationship, and customers will have continual online access to a firm’s Form CRS via a website posting, making the need to ‘‘push out’’ the Form CRS at additional points unnecessary.’’); Institute for Portfolio Alternatives Letter (‘‘We suggest that delivery of a new or updated Form CRS with every transaction would be excessive, impractical and without commensurate investor benefit’’); UBS Letter (‘‘If a client already has both a brokerage account and an advisory account and is transferring assets from one to another . . . the client already would have the critical disclosures applicable to both account types . . . .’’). PO 00000 743 RAND 744 See Frm 00236 Fmt 4701 Sfmt 4700 requirements of existing disclosures.749 One commenter also stated that the proposed additional delivery requirements could overwhelm investors in a counterproductive way.750 Furthermore, commenters requested additional guidance or examples for what would ‘‘materially change’’ the relationship.751 In addition, some commenters expressed concerns about administrative and operational burdens relating to the proposed additional delivery requirements.752 For example, one commenter asserted that firms would be required to build entirely new operational and supervisory processes to identify asset movements divorced from any account opening process that could trigger an additional delivery requirement.753 This commenter also argued that the review that would be required prior to effecting potentially triggering asset movements could cause delays that are detrimental to the retail 749 See, e.g., Comment Letter of AXA (Aug. 7, 2019) (‘‘[E]xisting customers have already decided which firm to work with, so requiring firms to send the Relationship Summary to those customers is likely to cause customer confusion.’’); Pickard Djinis and Pisarri Letter (‘‘The disharmony between the existing ADV brochure delivery requirements and the proposed requirements under Rule 204–5 are likely to confuse clients. . . .’’); UBS Letter (‘‘[R]eceiving the Form CRS again in such circumstances would likely lead to confusion rather than an improved understanding.’’). 750 See SIFMA Letter (‘‘Providing Form CRS to investors beyond [changes from one type of account to another] could overwhelm them with duplicative or redundant information,’’ making it ‘‘less likely they will digest the information.’’). 751 See, e.g., Prudential Letter (‘‘[M]ore guidance is needed on this point; additional examples of triggering events would provide clarity.’’); TIAA Letter (‘‘SEC should identify additional instances beyond account changes that would trigger redelivery.’’); Cambridge Letter (requesting further guidance on a material change to the nature and scope of the relationship and encouraging SEC to provide a broad set of examples); SIFMA Letter (‘‘[I]t is not clear what ‘other material’ changes or assets movements ‘not in the normal, customary, or already agreed course of dealing’ would be’’); Institute for Portfolio Alternatives Letter (requesting guidance on what facts and circumstances would trigger a ‘‘material’’ change and require delivery of a new, or updated, Form CRS); Comment Letter of Sorrento Pacific Financial, LLC (Aug. 7, 2018). 752 See SIFMA Letter; LPL Financial Letter; Institute for Portfolio Alternatives Letter; Pickard Djinis and Pisarri Letter (additional delivery requirements ‘‘would impose unjustifiable administrative burdens on advisers, the majority of whom are small businesses.’’). 753 See SIFMA Letter (explaining that, because additional delivery triggers could be divorced from any account opening process, entirely new operational and supervisory processes would need to be designed (i) to identify potentially triggering asset movements; (ii) to review for whether a proposed asset movement is not in the normal, customary, or already agreed course of dealing; and (iii) depending on whether delivery were required, create and preserve either a record of the delivery or of the conclusion that no such delivery was required). E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations investor.754 Similarly, another commenter explained that most of the proposed additional delivery triggers would be relatively easy to identify and address through existing processes, such as new account openings and when a brokerage account is converted to an investment advisory account and vice versa.755 Other potential delivery triggers, however, such as investments of inheritances or proceeds of a property sale, or a significant migration from savings to investment, would present operational challenges and compliance costs.756 These commenters recommended limiting additional delivery requirements to circumstances in which a brokerage account is converted to an investment advisory account and vice versa.757 We disagree that delivery of the relationship summary to existing clients and customers is unnecessary if the investor has already received one. As noted above, when investors are again making decisions about whether to choose an investment advisory or brokerage account, we believe they will benefit from being reminded that different options are available and where they can get more information to inform their choice. We are not requiring that the relationship summary be delivered at periodic intervals or at every transaction; thus we disagree with comments that the additional delivery obligations will not provide commensurate benefit to investors, or will confuse or overwhelm investors. We are therefore adopting additional delivery requirements that apply to a firm’s existing clients and customers, with some modifications from those proposed. First, as proposed (and supported by two commenters as noted above), we are adopting the requirement that a firm deliver the relationship summary when opening any new account that is different from the retail investor’s existing account(s).758 Second, in response to comments we are replacing the proposed standard of ‘‘materially change the nature and scope of the relationship’’ with two, more specific and easily identifiable, triggers that we believe would not implicate the same operational or supervisory burdens described by commenters to meet the jbell on DSK3GLQ082PROD with RULES2 754 See SIFMA Letter. LPL Financial Letter. 756 See LPL Financial Letter (explaining that its existing systems are not designed to monitor and record dates of non-ordinary course events or to distinguish those events from routine account changes). 757 See SIFMA Letter; LPL Financial Letter. 758 General Instruction 9.A. to Form CRS. 755 See VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 proposed requirement.759 Instead, firms will be required to deliver a relationship summary to existing clients and customers when recommending that the retail investor roll over assets from a retirement account, or recommending or providing a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account, for example, the first-time purchase of a direct-sold mutual fund or insurance product (e.g., variable annuities) that is a security through a ‘‘check and application’’ process, i.e., not held directly within an account.760 While these requirements will still impose operational and supervisory burdens, we believe they are more easily identified and monitored, such that firms will not need to create new systems or processes to the extent that commenters said would be necessary to comply with the proposed ‘‘material change’’ standard. These more specific triggers are intended to provide investor protection under these circumstances in a more cost-effective manner, while still addressing the objectives that the ‘‘material changes’’ language sought to address, that is, to ensure that a firm does not switch existing customers or clients into accounts or services without explaining or giving them the opportunity to consider other available options.761 Also, as proposed, we are adopting the instruction that firms must deliver the relationship summary to a retail investor within 30 days upon the retail investor’s request.762 While some commenters requested changes to the proposed delivery requirements, they nonetheless supported requiring delivery upon request.763 Finally, delivery of the relationship summary will not necessarily satisfy any other disclosure obligations the firm has under the federal securities laws or other laws or regulations, as proposed. The relationship summary requirement will be in addition to, and not in lieu of, other disclosure and reporting requirements or other obligations for broker-dealers and investment advisers.764 One commenter suggested that we require that the relationship 759 See supra footnotes 752–757 and accompanying text. 760 General Instruction 9.A. to Form CRS. 761 Recommendations of account types to existing customers and clients also are addressed in the Regulation Best Interest Release and Fiduciary Release, supra footnote 47. 762 General Instruction 9.B. to Form CRS. 763 See Fidelity Letter; SIFMA Letter. 764 For example, the relationship summary would not necessarily satisfy the disclosure requirements under Regulation Best Interest. See Regulation Best Interest Release, supra footnote 47. PO 00000 Frm 00237 Fmt 4701 Sfmt 4700 33553 summary include a prominent statement that it does not replace, but rather should be read in conjunction with, Form ADV or Form BD.765 This commenter also suggested that the relationship summary should include a hyperlink to the appropriate Form ADV or Form BD, as applicable.766 We believe that the required links in the Additional Information section, discussed in Section II.B.5. above, addresses these comments. Some commenters argued that investment advisers should not be required to deliver a relationship summary to retail clients because they already deliver a Form ADV Part 2A brochure.767 We disagree. By requiring both investment advisers and brokerdealers to deliver a relationship summary that discusses at a high level both types of services and their differences in a comparable format, the relationship summary would help all retail investors compare not only among investment advisory services, but also between investment advisory and brokerage services. We do not believe that existing disclosures provide this level of transparency and comparability across investment advisers, brokerdealers, and dual registrants. Form CRS is a summary disclosure designed to provide a high-level overview of services, fees, costs, conflicts of interest, standard of conduct, and disciplinary history, to retail investors in order to help them decide whether to engage a particular firm or financial professional, including deciding whether to seek investment advisory or brokerage services. Form ADV Part 2A, in contrast, requires more detailed disclosures specific to advisory services. 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 will not be required to prepare or file a relationship summary, as proposed.768 765 See Financial Engines Letter. Financial Engines Letter. 767 Comment Letter of Registered Advisor Services (Apr. 20, 2018); Comment Letter of Franklin Templeton Investments (Aug. 6, 2018); IAA Letter I; Triad Letter; Pickard Djinis and Pisarri Letter; Prudential Letter; see also State Farm Letter (arguing that investment advisers should be required to include in their relationship summaries only those disclosures that are not otherwise available, provided that a representative heading or introductory statement and a hyperlink to such disclosures are provided in the Relationship Summary). 768 See amended Advisers Act rule 203–1, note to paragraph (a)(1); Exchange Act rule 17a–14(a), (b). See introduction of General Instructions to Form CRS. 766 See E:\FR\FM\12JYR2.SGM 12JYR2 33554 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 4. Updating Requirements We are adopting substantially as proposed a requirement for firms to update the relationship summary within 30 days whenever the relationship summary becomes materially inaccurate.769 Firms also must post the latest version on their website (if they have one), and electronically file the relationship summary with the Commission.770 Although some commenters expressed different views on the requirement to communicate updated information to retail investors, as discussed below, most commenters did not object to the proposed requirements to update the relationship summary within 30 days of a material change and the associated posting and filing obligations.771 On the other hand, one commenter advocated that firms be allowed 60 days to update the relationship summary to address operational issues, but did not describe the specific operational challenges.772 Based on our experience with other similar filings, we believe the proposed approach is consistent with the current requirements for investment advisers to update the Form ADV Part 2A brochure,773 and with broker-dealers’ current obligations, including to update Form BD if its information is or becomes inaccurate for any reason.774 We continue to believe that allowing 30 days for firms to make updates provides sufficient time for firms to make the necessary revisions. Therefore, we are 769 Advisers Act rule 204–1(a)(2) and Exchange Act rule 17a–14(b)(3); General Instruction 8.A. to Form CRS. For investment advisers, we are also adopting amendments to the General Instructions to Form ADV to mirror this requirement and to clarify the filing type. See amended General Instruction 4 to Form ADV (revised to add the following language: ‘‘If you are registered with the SEC, you must amend Part 3 of your Form ADV within 30 days whenever any information in your relationship summary becomes materially inaccurate by filing with the SEC an additional other-than-annual amendment or by including the relationship summary as part of an annual updating amendment.’’); see also supra footnotes 673–677 and accompanying text. 770 Advisers Act rules 203–1(a)(1), 204–5(b)(3) and Exchange rules 17a–14(b)(2), 17a–14(c)(3); General Instructions 8.A., 8.C., and 10.A. to Form CRS. 771 See, e.g., Trailhead Consulting Letter (‘‘If the form is kept to a more generalized and educational nature, material changes shouldn’t occur too often.’’); NASAA Letter; LPL Financial Letter; Prudential Letter; Primerica Letter. 772 See Morgan Stanley Letter (30 days ‘‘may not be sufficient to address the related operational issues’’). 773 See, e.g., Advisers Act rule 204–5(b)(4); General Instruction 8 to Form CRS. Generally, an investment adviser registered with the SEC is required to amend its Form ADV promptly if information provided in its brochure becomes materially inaccurate. See Advisers Act rule 204– 1(a)(2); General Instruction 4 to Form ADV. 774 See, e.g., Exchange Act rule 15b3–1. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 adopting these requirements as proposed. The proposed instructions also would have required firms, without charge to the retail investor, to communicate updated information by delivering the amended relationship summary or by communicating the information another way.775 As noted above, commenters expressed different views regarding this approach. Some commenters advocated for posting the relationship summary on a firm’s website in order to meet the communication requirement.776 On the other hand, one commenter advocated for requiring firms to deliver updated relationship summaries whenever a change is made, rather than permitting firms to communicate the information in another way.777 We are adopting slightly revised final instructions to eliminate the proposed wording ‘‘another way’’ in order to clarify that a firm may communicate the information through another disclosure, and that disclosure must be delivered to the retail investor.778 In other words, merely providing notice of or access to another disclosure or the relationship summary would not satisfy this final instruction. 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 that also contained the updated information, this would support a reasonable belief that the information had been communicated to the retail investor, and the investment adviser will not be required to deliver an updated relationship summary to that retail investor. This requirement provides firms the flexibility to disclose changes to the relationship summary without requiring them to incur additional delivery costs. In another modification from the proposal, the rules as adopted will allow firms to communicate the information in an amended relationship summary to retail investors who are existing clients or customers within 60 days after the updates are required to be 775 See Proposed General Instruction 6.(b) to Form CRS. 776 See, e.g., Fidelity Letter (‘‘We also support the SEC’s position that with respect to material changes of information provided in a Form CRS, firms must either provide an updated Form CRS to retail investors or communicate the changes in another way such as posting on the firm’s website.’’); Morgan Stanley Letter; Primerica Letter. 777 See NASAA Letter. 778 General Instruction 8.B. to Form CRS (‘‘You can make the communication by delivering the amended relationship summary or by communicating the information through another disclosure that is delivered to the retail investor.’’). PO 00000 Frm 00238 Fmt 4701 Sfmt 4700 made, instead of 30 days as proposed.779 Two commenters advocated that allowing 60 days for the communication would increase the likelihood that firms could deliver an updated relationship summary along with other disclosures that firms commonly deliver on a quarterly basis, rather than in a separate delivery.780 Delivery with other disclosures is consistent with the instructions regarding the way in which relationship summary updates may be communicated. We are clarifying this, as noted above, and adopting the requirement that firms must communicate updates to the relationship summary within 60 days after the updates are required to be made. In a further change from the proposal, firms must highlight the changes in an amended relationship summary by, for example, marking the revised text or including a summary of material changes and attaching the changes as an exhibit to the unmarked amended relationship summary.781 The unmarked amended relationship summary and exhibit must be filed with the Commission.782 We believe that including this exhibit is important in assisting retail investors to assess changes that may impact their accounts or their relationships with their firm or financial professional. A retail investor will be able to find the latest version of the relationship summary through Investor.gov and on the firm’s website, if it has one, and firms will be required to deliver a relationship summary within 30 days upon the retail investor’s request, as proposed.783 As discussed in the proposal, for purposes of the requirement to communicate updates to the 779 Advisers Act rule 204–5(b)(4) and Exchange Act rule 17a–14(c)(4); Proposed General Instruction 6.(b) to Form CRS. 780 See LPL Financial Letter; Morgan Stanley Letter. For example, NASD Rule 2340 requires broker-dealers to deliver account statements generally on a quarterly basis. 781 General Instruction 8.C. to Form CRS (‘‘Each amended relationship summary that is delivered to a retail investor who is an existing client or customer must highlight the most recent changes by, for example, marking the revised text or including a summary of material changes. The additional disclosure showing revised text or summarizing the material changes must be attached as an exhibit to the unmarked amended relationship summary.’’). As an addition to the proposal, we are also amending General Instruction 4 to Form ADV to mirror this requirement (‘‘You must include an exhibit highlighting the most recent changes required by Form ADV, Part 3 (Form CRS), General Instruction 8.C.’’); see also supra footnotes 673–677 and accompanying text. 782 General Instruction 8.A. to Form CRS; see also General Instruction 4 to Form ADV. 783 Advisers Act rules 204–5(b)(3) and 204–5(b)(5) and Exchange Act rules 17a–14(c)(3) and 17a– 14(c)(5); General Instruction 9.B. to Form CRS. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations relationship summary, 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, a broker-dealer will be required to provide the relationship summary to customers who have socalled ‘‘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 continue to believe this approach will facilitate broker-dealers building upon their current compliance infrastructure in identifying existing customers 784 and will enhance investor protections to retail investors engaging the financial services of broker-dealers. D. Transition Provisions jbell on DSK3GLQ082PROD with RULES2 To provide adequate notice and opportunity to comply with the adopted relationship summary filing requirements, firms that are registered, or investment advisers who have an application for registration pending, with the Commission prior to June 30, 2020 will have a period of time beginning on May 1, 2020 until June 30, 2020 to file their initial relationship summaries with the Commission.785 On and after June 30, 2020, newly registered broker-dealers will be required to file their relationship summary with the Commission by the date on which their registration with the Commission becomes effective, and the Commission will 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.786 The adopted transition period is longer than we proposed. The proposal would have required broker-dealers to comply with their relationship summary obligations beginning six months after the effective date of the new rules and rule 784 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 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). 785 See Exchange Act rule 17a–14(f), Advisers Act rules 203–1(a)(2) and 204–1(e); Instruction 7.C. to Form CRS. 786 See Exchange Act rule 17a–14(f) and Advisers Act rule 203–1(a)(2); Instruction 7.C. to Form CRS. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 amendments.787 Similarly, in the proposal, investment advisers or dual registrants would have been required to comply with the new filing requirements as part of the firm’s next annual updating amendment to Form ADV that would have been required after six months after the rule’s effective date.788 The extended time to comply with the relationship summary requirements reflects our consideration of comments we received from firms and the modifications to the proposed requirements of the relationship summary. In the proposal, we asked for comment on the proposed implementation requirements and whether the six-month period was enough time for newly registered broker-dealers and investment advisers to prepare an initial relationship summary.789 A number of commenters requested a longer implementation period, ranging from 12 to 24 months from the effective date.790 One commenter suggested a phased-in approach, such that requirements may be effected at different points in time.791 Commenters cited a number of reasons for a longer implementation period, including the time needed to hire additional staff and create and deploy new disclosures, procedures, training, and technology,792 as well as to have the opportunity to apply innovative technology and designs.793 We are mindful of the time needed to create the relationship summary, as well as to update a firm’s policies, procedures, and systems in order to provide these new disclosures. We are, however, lengthening the time that firms will have to comply relative to the proposal after considering commenters’ suggestions for a longer implementation period. We expect that approximately twelve months will be adequate for firms to conduct the requisite operational changes to their systems and to establish internal processes to satisfy their relationship summary obligations. Some commenters expressed the view that the proposed one-time, initial 787 See Proposed Instruction 5.c. to Form CRS. See Advisers Act proposed rule 203–1(a)(2) and Exchange Act proposed rule 17a–14 (f)(1). 788 See id. 789 See Proposing Release. 790 See, e.g., IAA Letter I (requesting a 12 month implementation period from the effective date); CCMC Letter (requesting 18 months); IRI Letter (requesting 18–24 months); Comment Letter of HD Vest Financial Services (Aug. 7, 2018) (‘‘HDVest Letter’’) (requesting 18 months); Cetera Letter I; SIFMA Letter (requesting at least 24 months from the date the final rules are approved). 791 See SIFMA Letter. 792 See HDVest Letter. 793 See IAA Letter I. PO 00000 Frm 00239 Fmt 4701 Sfmt 4700 33555 delivery to existing clients and customers is not necessary.794 One survey reported, on the other hand, that over 90% of survey respondents with an existing financial professional relationship stated that they knew more about their relationship with the adviser after reading the proposed relationship summary.795 We believe the information contained in the relationship summary could improve existing investors’ ability to monitor and make more informed decisions related to their existing relationships with firms during their duration, including whether to terminate a relationship. For example, as discussed above in Section II.A., retail investors that may learn of account types whose minimum requirements they did not meet when they first opened their existing account, through a one-time, initial delivery to existing clients and customers. Upon seeing this range of options, existing clients and customers could seek to take advantage of cost savings or additional services offered through these other account types. We believe that existing clients and customers would benefit from this one-time delivery of the relationship summary and therefore are adopting the requirement as proposed. Firms will be required to deliver their relationship summary to new and prospective clients and customers who are retail investors as of the date by which they are first required to electronically file their relationship summary with the Commission.796 In addition, as proposed, firms will be required, as part of the transition, to 794 See, e.g., Fidelity Letter (existing customers are already familiar with the services offered to them by their broker-dealer or investment adviser. . . but can of course access a copy posted on the firm’s website); AXA Letter (delivering the relationship summary to existing customers is likely to be confusing); Cetera Letter I (firms should not be required to deliver a new or amended Form CRS to [existing] clients except in limited circumstances, such as when the client establishes a different type of account than they already have). 795 See Cetera Letter II (Woelfel), supra footnote 17 (84% of respondents stated that they knew a lot or a little more about their financial adviser after reviewing the Form CRS than they did before; among respondents with current relationships with a broker or adviser, over 90% said they knew more); see also CCMC Letter (investor polling), supra footnote 21 (in a survey of investors with investments outside of a work sponsored 401(k), pension or personal real estate, 72% of participants responding to a question describing that new rules could require financial professionals to deliver ’’ a standardized four page document that explains the relationship between the financial professional and clients’’ agreed that the new disclosure document ‘‘will boost transparency and help build stronger relationships between me and my financial professional’’ and 62% indicated that they were ‘‘very interested’’ in reading the document). 796 See Advisers rule 204–5(e)(2) and Exchange Act rule 17a–14(f)(4); Instruction 7.C.iii. to Form CRS. E:\FR\FM\12JYR2.SGM 12JYR2 33556 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations deliver their relationship summaries to all existing clients and customers who are retail investors on an initial onetime basis within 30 days after the date the firm is first required to file its relationship summary with the Commission.797 jbell on DSK3GLQ082PROD with RULES2 E. Recordkeeping Amendments We are adopting amendments to the recordkeeping and record retention requirements under Advisers Act rule 204–2 and Exchange Act rules 17a–3 and 17a–4, as proposed. These rules set forth requirements for firms to make, maintain, and preserve specified books and records. Pursuant to paragraph (a)(14)(i) of Advisers Act Rule 204–2 as amended, investment advisers will be required to make and preserve a record of the dates that each relationship summary was given to any client or prospective client who subsequently becomes a client.798 New paragraph (a)(24) of Exchange Act Rule 17a–3 as adopted will require broker-dealers to create a record of the date on which each relationship summary was provided to each retail investor, including any relationship summary provided before such retail investor opens an account.799 In addition, paragraph (a)(14)(i) of Advisers Act rule 204–2, as amended, will require investment advisers to retain copies of each relationship summary and each amendment or revision thereto while paragraph (e)(10) of Exchange Act rule 17a–4, as amended, will require brokerdealers to maintain and preserve a copy of each version of the relationship summary as well as the records required to be made pursuant to new paragraph (a)(24) of Exchange Act rule 17a–3 as adopted by the Commission.800 The amended rules set forth the manner in 797 See Advisers rule 204–5(e)(1) and Exchange Act rule 17a–14(c) and (f)(3); adopted Instruction 7.C.iv. to Form CRS. 798 See amended Advisers Act rule 204– 2(a)(14)(i). 799 See Exchange Act rule 17a–3(a)(24). 800 The effect of the amended and adopted rules will require both investment advisers and brokerdealers to maintain copies of all versions of the relationship summary and the dates they are provided or given to existing or prospective retail customers; see also General Instruction 6.A. to Form CRS (requiring firms to maintain a copy of each version of the relationship summary and make it available to the SEC staff upon request). The Commission notes that pursuant to Exchange Act rule 17a–3(e), for purposes of transactions in municipal securities by municipal securities brokerdealers, compliance with Rule G–8 of the Municipal Securities Rulemaking Board (‘‘MSRB’’) will be deemed to be in compliance with the recordkeeping requirements for broker-dealers. Accordingly, for purposes of transactions in municipal securities, a broker-dealer may satisfy its recordkeeping obligations under Exchange Act rule 17a–3(a)(24), as adopted, by complying with Rule G–8 of the MSRB. See Exchange Act rule 17a–3(e). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 which and the period of time for which these record must be retained.801 These records will facilitate the Commission’s ability to inspect for and enforce compliance with the relationship summary requirements. We received no comments on the proposed manner and time period for records preservation or the requirement to maintain a copy of each version of the relationship summary and each amendment or revision to the relationship summary.802 We are adopting these requirements as proposed. Some commenters expressed concern with the potential costs and feasibility of complying with the proposed recordkeeping requirements for broker-dealers.803 Several commenters argued that keeping records of when a relationship summary was given to a prospective retail investor would be unnecessarily burdensome for firms and would likely provide de minimis benefits.804 Some investment adviser and broker-dealer commenters stated that most firms’ recordkeeping systems and procedures are not designed to maintain records relating to prospective clients and that conforming such systems and procedures to the proposed rule requirements would be burdensome and costly and would not result in an offsetting benefit.805 Others noted they may have to retain records for an indefinite length of time because their interactions with prospective clients about engaging services often span weeks, months or years and may include numerous phone calls, meetings or other forms of contact.806 As an alternative, commenters suggested that firms only be required to 801 Investment advisers will be required to maintain and preserve these records in an easily accessible place for a period of 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. See Advisers Act rule 204–2(e)(1). Brokerdealers will be required to maintain these records in an easily accessible place until six years after such record or relationship summary is created. See Exchange Act rules 17a–3(a)(24) and 17a–4(e)(10) as amended. 802 See Exchange Act rule 17a–4(e)(10) as proposed to be amended and Advisers Act rule 204–2(e)(1) (which would apply to amended rule 204–2(a)(14)(i) as proposed to be amended). The recordkeeping requirements for investment advisers will mirror the current recordkeeping requirements for Form ADV Part 2. See Advisers Act amended rule 204–2(a)(14)(i) as proposed to be amended and rule 204–2(e)(1). 803 See, e.g., CCMC Letter; Committee of Annuity Insurers Letter; Edward Jones Letter; Morgan Stanley Letter; Primerica Letter; SIFMA Letter; IPA Letter. 804 See id. 805 See, e.g., Committee of Annuity Insurers Letter; Edward Jones Letter; Morgan Stanley Letter; Primerica Letter; SIFMA Letter. 806 See, e.g., Edward Jones Letter; Primerica Letter; SIFMA Letter. PO 00000 Frm 00240 Fmt 4701 Sfmt 4700 maintain a record of the most recent date they delivered the relationship summary to a prospective client that becomes an actual client preceding the opening of an account.807 Commenters suggested only requiring a record that the relationship summary was delivered at account opening or when a retail investor becomes an investment advisory client.808 Based on our experience with similar recordkeeping requirements for the Form ADV Part 2A brochure, requiring firms to create and maintain records of the dates they provide or give a relationship summary to an existing, new, or potential retail investor will facilitate examiners’ ability to inspect and examine for compliance with the relationship summary delivery and content requirements. Specifically, the dates will help examiners to identify the relationship summary disclosures that retail investors may have relied on to decide whether to engage a firm’s services. Absent having these dates to examine, we believe that it would be exceedingly difficult for examiners to evaluate firms’ compliance with the relationship summary delivery and content requirement. These records also may assist firms in monitoring their compliance with the relationship summary delivery requirements. Recordkeeping obligations for the relationship summary may be less burdensome if firms’ recordkeeping and compliance systems are already capable of creating and maintaining records related to communications with prospective clients. For example, investment advisers are required to keep similar records for the delivery of the Form ADV Part 2A brochure 809 and broker-dealers, especially those registered with FINRA, are subject to comparable recordkeeping requirements with respect to communications and correspondence with prospective retail investors.810 807 See, e.g., CCMC Letter; SIFMA Letter. e.g., SIFMA Letter; Morgan Stanley; Edward Jones Letter. 809 See, e.g., Advisers Act rule 204–2. 810 See, e.g., Exchange Act rule 17a–4(b)(4) requiring broker-dealers to maintain a record of all communications sent relating to its business as such; see also, e.g., FINRA Rule 2210(a)(5) (defining ‘‘retail communication’’ to mean ‘‘any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.’’); FINRA Rule 2210(b)(4) (requiring all FINRA members to ‘‘maintain all retail communications and institutional communications for the retention period required by SEA Rule 17a–4(b) and in a format and media that comply with SEA Rule 17a– 4 . . . [and] . . . all correspondence in accordance with the record-keeping requirements of [FINRA] Rules 3110.09 [on supervision, requiring FINRA members to retain the internal communications and 808 See, E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 Several firms also requested clarification and expressed concern regarding the potential recordkeeping implications related to the ‘‘Key Questions to Ask’’ provision of the proposal.811 Some commenters stated that requiring firms to make and maintain records of their answers to the ‘‘Key Questions to Ask’’ and of supplemental information crossreferenced in or linked from the relationship summary would result in substantial and unnecessary burdens and/or might stifle potentially beneficial discussions between firms, clients and/ or prospective clients.812 Commenters requested clarification that ‘‘Key Questions to Ask’’ are intended to promote dialog between firms and clients rather than creating any sort of recordkeeping requirement, which commenters believed could lead to less robust discussions between firms and clients.813 As discussed above, the ‘‘Key Questions to Ask’’ section of the relationship summary has been eliminated, but firms will be required to include ‘‘conversation starters’’ in their relationship summary.814 We are not establishing new or separate recordkeeping obligations related to the conversation starters or the answers provided by firms in response to the conversation starters. We are also not adding separate or new recordkeeping obligations related to the use of layered disclosure in the relationship summary. Current recordkeeping rules for investment advisers and broker-dealers already impose recordkeeping and retention requirements related to a firm’s disclosures and other communications with retail investors, which will include responses to conversation starters or information cross-referenced in the relationships summary.815 Responses to conversation correspondence of associated persons relating to the member’s investment banking or securities business for the period of time and accessibility specified in SEA Rule 17a–4(b)] and 4511 [establishing general requirements for members to ‘‘preserve books and records as required under the FINRA rules, the Exchange Act and the applicable Exchange Act rules’’]). 811 See, e.g., CCMC Letter; TIAA Letter; LPL Financial Letter; IPA Letter; NSCP Letter. 812 See, e.g., Edward Jones Letter; CCMC Letter; NSCP Letter; SIFMA Letter; Morgan Stanley Letter; TIAA Letter; LPL Financial Letter. 813 See, e.g., Edward Jones Letter; CCMC Letter; TIAA Letter; LPL Financial Letter. 814 See supra Section II.A.4. 815 For example, with respect to investment advisers, if a conversation starter prompts a written communication that includes a recommendation made or proposed to be made or any advice given or proposed to be given by the investment adviser, such a communication may be subject to the recordkeeping requirements of Advisers Act rule 204–(2)(a)(7). Also, for example, broker-dealers, VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 starters or hyperlinked material may trigger recordkeeping requirements under other federal securities statutes and rules or the rules of self-regulatory organizations of which firms are members or registrants.816 Further, firms may wish to develop scripts for their financial professionals in responding to conversation starters to ensure the quality and consistency of responses and then preserve the scripts for compliance purposes. III. Disclosures About a Firm’s Regulatory Status and a Financial Professional’s Association In connection with Form CRS, we recognized that 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.817 This concern was particularly acute where such communications 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.818 To mitigate these concerns, we proposed additional rules as part of the Proposing Release. One of our proposed rules required disclosure of a firm’s regulatory status and a financial professional’s association with a firm. Specifically, we proposed rules under the Exchange Act and the Advisers Act that would have required a broker-dealer and an investment adviser to prominently disclose that it is registered as a broker-dealer or investment adviser, as applicable, with the Commission in print or electronic retail investor communications.819 The proposed Exchange Act rule also would have required 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.820 Similarly, the under Exchange Act Rule 17a–4(b)(4), are required to maintain records of the ‘‘[o]riginals of all communications received and copies of all communications sent (and any approvals thereof) by the member, broker or dealer (including interoffice memoranda and communications) relating to its business as such. . .’’; see also the recordkeeping requirements of FINRA Rule 2210. 816 See id. 817 See Proposing Release, supra footnote 5, at footnotes 374–375 and accompanying text. 818 See id. 819 See id., at footnotes 437–439 and accompanying text. 820 See id. PO 00000 Frm 00241 Fmt 4701 Sfmt 4700 33557 proposed Advisers Act rule would have required 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.821 As we discussed in the Proposing Release, we believed that requiring a firm to disclose whether it is a broker-dealer or an investment adviser in print or electronic retail investor communications would assist retail investors in determining which type of firm is more appropriate for their specific investment needs.822 For similar reasons, we noted 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.823 Several commenters expressed general support for the proposed Affirmative Disclosures.824 Some of these commenters believed that the rules could be beneficial in helping investors to understand the legal distinctions between broker-dealers and investment advisers.825 Another commenter in support of the Affirmative Disclosures stated that investors would benefit more if they were also provided with readily accessible regulatory and disciplinary histories of the financial professional.826 However, one commenter noted that while ‘‘the required disclosure could have some modest benefit, . . . it is important not to overstate [its] likely value.’’ 827 Several commenters also opposed the Affirmative Disclosures.828 Some commenters believed that the proposed rules were duplicative, noting that 821 See id. Proposing Release, supra footnote 5, at footnotes 440–441 and accompanying text. 823 See id. We also proposed rules that would have restricted broker-dealers and their associated persons from using the terms ‘‘adviser’’ or ‘‘advisor’’ as part of a name or title when communicating with retail investors in certain circumstances. We are not adopting those rules, as further discussed in the Regulation Best Interest Release. See Regulation Best Interest Release, supra footnote 47. 824 See CFA Letter I; CFA Institute Letter I (stating that ‘‘[r]equiring them to call themselves what they legally are will enable investors to better understand the distinction’’); Better Markets Letter. 825 See CFA Institute Letter I; CFA Letter I; LPL Financial Letter. 826 See Better Markets Letter. 827 See CFA Letter I. 828 Some commenters also opposed the proposed Affirmative Disclosures because investors do not understand what it means to be registered or what the legal terms mean. See Altruist Letter; IRI Letter. See also LPL Financial Letter (noting that regulatory status is not important to an investor when being casually introduced for the first time to a financial professional and receiving a business card); Bank of America Letter; SIFMA Letter. 822 See E:\FR\FM\12JYR2.SGM 12JYR2 33558 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 Regulation Best Interest, Form CRS, and/or other required disclosure obligations (e.g., Form ADV, FINRA Rule 2210) would inform retail investors of the capacity of a firm and its financial professionals, obviating the need for the additional rules.829 Some of these commenters stated that Form CRS alone or in combination with FINRA Rule 2210(d)(3) (providing specific requirements for disclosure of the broker-dealer’s name in retail communications and correspondence) would provide retail investors with a firm’s capacity and its name, making the Affirmative Disclosures duplicative.830 Several commenters also opposed the Affirmative Disclosures because they believed the costs to implement and comply with the proposed rules did not justify the benefits.831 In particular, these commenters noted a range of costrelated impacts, such as replacing new and existing business cards 832 and amending numerous electronic and print marketing materials.833 Several commenters also noted the difficultly in implementing and supervising specific types of communication including business cards, oral communications, and voice overlay and on-screen text in televised or video presentations.834 After considering the comments received and the obligations we are adopting under Regulation Best Interest 829 See, e.g., LPL Financial Letter (stating that Form ADV, Form CRS, and Regulation Best Interest already ‘‘communicate to investors the capacity in which they are acting on behalf of the investor and the material facts related to the investor’s relationship with the firm and its financial professionals.’’); SIFMA Letter (stating that ‘‘information regarding regulatory status is contained in Proposed Form CRS, and Proposed Form CRS is available at all times on a firm’s website, in addition to periodic distribution to clients.’’); IRI Letter; Committee of Annuity Insurers Letter; Letter from Mari-Anne Pisarri, Pickard Djinis and Pisarri LLP (‘‘Pickard Letter’’) (stating ‘‘the Commission should determine whether the existing Form ADV brochure supplement adequately informs retail investors of the registration status of the advisory representatives they deal with . . . .’’) 830 See, e.g., IRI Letter; Bank of America Letter; Committee of Annuity Insurers Letter. See also SIFMA Letter (noting that Form CRS resolves any confusion that may exist regarding whether a financial professional or firm is a broker-dealer or an investment adviser and would be available on a firm website and given periodically to investors). 831 See, e.g., LPL Financial Letter; Bank of America Letter; IRI Letter; SIFMA Letter. 832 See IRI Letter. See also SIFMA Letter (noting also that firms would need to reprint all business cards and modify ‘‘firm technologies and electronic communications’’). 833 See LPL Financial Letter (noting ‘‘significant financial costs’’). 834 See Bank of America Letter; IRI Letter; SIFMA Letter; Altruist Letter. See also Committee of Annuity Insurers Letter (noting also that there are operational challenges in situations where marketing materials or account statements are used or distributed by a product sponsor rather than the firm itself). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 and Form CRS, we have concluded that the capacity disclosure requirement in Regulation Best Interest and Form CRS are sufficient to achieve the objectives of the proposed Affirmative Disclosures. These rules enhance retail investor awareness of the firm and professional type that they are engaging or seeking to engage and would therefore assist a retail investor in choosing the type that best suits his or her financial goals. As discussed in the Regulation Best Interest Release, as part of its disclosure obligations, a broker-dealer and its associated natural persons must disclose when they are acting as a broker-dealer when making a recommendation. This type of disclosure is designed to improve awareness among retail customers such that a retail customer can more readily identify and understand their relationship.835 This capacity disclosure requires a brokerdealer and its financial professionals to disclose that the firm or the financial professional is acting as a broker-dealer, as a material fact relating to the scope and terms of the relationship subject to its disclosure obligation.836 As noted in the Regulation Best Interest Release, a broker-dealer and its financial professionals must disclose the required information prior to or at the time of a recommendation but Regulation Best Interest does not mandate the form, specific time, or method of delivering disclosures pursuant to its disclosure obligation.837 In fulfilling this obligation, a broker-dealer that is not a dual registrant generally will be able to satisfy the requirement to disclose the broker-dealer’s capacity by delivering the Relationship Summary to the retail customer. For broker-dealers who are dually registered, and for associated persons who are either dually licensed or are not dually licensed and only offer broker-dealer services through a firm that is dually registered, the information contained in the Relationship Summary will not be sufficient to disclose their capacity in making a recommendation.838 As discussed in the Regulation Best Interest Release, although some commenters expressed concerns about potential investor confusion caused by ‘‘additional’’ disclosure regarding a dual registrant’s capacity, the disclosure obligations of Regulation Best Interest will not duplicate or confuse, but instead will provide clarifying detail on capacity to 835 See Regulation Best Interest Release, supra footnote 47, at Section II.C.1.a. 836 See id. 837 See id. 838 See id. PO 00000 Frm 00242 Fmt 4701 Sfmt 4700 supplement the information contained in the Relationship Summary.839 Additionally, as discussed above, Form CRS includes a requirement for firms to state their name and whether they are ‘‘registered with the Securities and Exchange Commission as a brokerdealer, investment adviser, or both.’’ 840 Form CRS is required to be delivered before or at the time the financial professional enters into an investment advisory relationship or, for a brokerdealer, before or at the earliest of a certain recommendation, the execution of a securities transaction, or the opening of a brokerage account.841 Additionally, Form CRS will need to be prominently posted on the firm’s public website, if it maintains one, in a location and format that is easily accessible to retail investors 842 and must be provided to retail investors 60 days after a material change is made.843 These requirements highlight for an investor’s attention, and promote access to, the capacity information at times that we believe are crucial to a retail investor when seeking to make a choice of financial firms. We recognize that the proposed Affirmative Disclosures would have included capacity requirements on more communications than what is required by Form CRS and capacity disclosure requirement in Regulation Best Interest. Specifically, under the Affirmative Disclosures, all forms of communications used by broker-dealers, investment advisers and their financial professionals, such as business cards, letterheads, social media profiles, and signature blocks would have included these required capacity disclosures. However, several commenters questioned whether the benefit provided by covering more communications justified the costs of implementing the requirements.844 839 See id. Item 1.A. of Form CRS. See also supra Section II.B.1. 841 See General Instruction 7.B to Form CRS. See also supra Section II.C. 842 See General Instruction 10.A. to Form CRS. See also supra Section II.C.3.a. 843 See General Instruction 8.B. to Form CRS. See also supra Section II.C.4. In addition, the most recent versions of firms’ relationship summaries will be accessible through Investor.gov. See supra footnote 698 and accompanying text. 844 See, e.g., IRI Letter (stating that the costs to amend ‘‘tens of thousands of business cards to add the new required disclosure outweighs any intended benefit, particularly since the Form CRS already accomplishes the same objective . . .’’); Committee of Annuity Insurers Letter (stating that the Affirmative Disclosure rules provide little benefit to investors and present operational challenges with respect to marketing materials created by product sponsors or issuers); LPL Financial Letter (noting that the benefits of these rules are outweighed by the ‘‘significant financial 840 See E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations While commenters did not provide quantitative data that would demonstrate the cost impact on firms, certain commenters did describe the scope of the impact along with the operational challenges in implementing the rule.845 One commenter stated that ‘‘the costs of such requirement would be significant’’ as firms would need to reprint all business cards to include this disclosure and make changes to firm technology and electronic communications to make the disclosure.846 Additionally, another commenter stated that adding a voice overlay and on-screen text for video presentations would be difficult to implement, costly, and challenging to supervise.847 After considering the comments received and the obligations we are adopting under Regulation Best Interest and Form CRS, we have concluded that the policy concerns underlying the Affirmative Disclosures are addressed by the rulemaking package we are adopting, particularly the disclosure jbell on DSK3GLQ082PROD with RULES2 cost’’ to amend ‘‘numerous electronic and print marketing materials, business cards, and other retail customer communications.’’) 845 See IRI Letter (noting that a voice overlay and on-screen text may be difficult to implement and to effectively supervise. Additionally, firms will incur ‘‘significant costs and resources to monitor such presentations’’ for the required disclosures ‘‘even though that same client already received the Form CRS disclosure.’’); LPL Financial Letter. See also Bank of America Letter (‘‘the [Affirmative Disclosure rules] will impose significant costs to implement since tens of thousands of business cards will need to be amended in order to add the new required disclosures.’’) 846 See SIFMA Letter (noting that ‘‘we do not believe the regulatory status disclosure would have an obvious benefit to investors. At the same time, the costs of such a requirement would be significant.’’) 847 See Bank of America Letter (stating further that ‘‘it would be virtually impossible to supervise whether [the required] disclosure was made in oral communications.’’); see also Altruist Letter (stating that including the disclosure in oral communications would be ‘‘awkward for a practitioner to implement.’’); Committee of Annuity Insurers Letter (stating that ‘‘it may not be feasible for a broker-dealer to include this information on marketing materials for investment products created and provided by a product sponsor.’’) VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 obligations in Regulation Best Interest and Form CRS, as discussed above.848 We therefore believe that the costs of the Affirmative Disclosures do not justify any incremental benefit of requiring registration status on all communications and as a result, we are not adopting the Affirmative Disclosures. IV. Economic Analysis A. Introduction The Commission is sensitive to the economic effects, including the benefits and costs and the effects on efficiency, competition, and capital formation that will result from the new rules and amendments to existing 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.849 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.850 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.851 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, to also consider whether the action will promote efficiency, competition, and capital formation, in 848 See Regulation Best Interest Release, supra footnote 47. 849 See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f). 850 See 15 U.S.C. 78w(a)(2). 851 Id. PO 00000 Frm 00243 Fmt 4701 Sfmt 4700 33559 addition to the protection of investors.852 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 not feasible due to lack of relevant data, or the difficulty of predicting how market participants would act under the conditions of the proposed rules. For example, to the extent that the relationship summary will increase retail investors’ understanding of the services provided to them, investors are likely to respond differently to the increased understanding. Such responses could be transferring to a different financial firm or professional, hiring a financial professional for the first time, not taking any action, deciding to invest on their own without advice, or entirely abandoning the brokerage or investment advisory market while moving their assets to other products or markets (e.g., bank deposits or insurance products). Given the number and complexity of assumptions that would be required to be able to estimate how the relationship summary will affect investors’ understanding and their decisionmaking, the Commission is not able to estimate the propensity of investors to respond in one way or another. In the economic analysis that follows, we first examine the current regulatory and economic landscape to form a baseline for our analysis. The economic effects of the adopted changes are discussed below. B. Baseline This section discusses, as it relates to this rulemaking, the current state of the broker-dealer and investment adviser markets, the current regulatory environment, and the current state of retail investor perceptions in the market. 852 15 E:\FR\FM\12JYR2.SGM U.S.C. 80b–2(c). 12JYR2 33560 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 1. Providers of Financial Services 853 a. Broker-Dealers This rule will affect registrants in the market for broker-dealer services, including dual registrants 854 and broker-dealers offering services to retail investors that are affiliated with an investment adviser.855 The market for broker-dealer services encompasses a small set of large and medium sized broker-dealers and thousands of smaller broker-dealers competing for niche or regional segments of the market.856 The jbell on DSK3GLQ082PROD with RULES2 853 In addition to broker-dealers and Commissionregistered investment advisers discussed below in the baseline, there are a number of other entities, such as state registered investment advisers, commercial banks and bank holding companies, and insurance companies, which also provide financial advice services to retail customers; however, because of unavailability of data, the Commission is unable to estimate the number of some of those other entities that are likely to provide financial advice to retail customers. A number of broker-dealers (see infra footnote 862) have non-securities businesses, such as insurance or tax services. As of December 2018, there are approximately 17,300 state-registered investment advisers. The Department of Labor in its Regulatory Impact Analysis identifies approximately 398 life insurance companies that could provide advice to retirement investors. See U.S. Department of Labor, Regulating Advice Markets: Definition of the Term ‘Fiduciary,’ Conflicts of Interest, Retirement Investment Advice: Regulatory Impact Analysis for Final Rule and Exemptions (Apr. 2016), available at https://www.dol.gov/sites/default/files/ebsa/ laws-and-regulations/rules-and-regulations/ completed-rulemaking/1210-AB32-2/ria.pdf (‘‘Regulatory Impact Analysis’’) 854 Not all firms that are dually registered as an investment adviser and a broker-dealer offer both brokerage and advisory accounts to retail investors. For example, some dually registered firms offer advisory accounts to retail investors but offer only brokerage services, such as underwriting services, to institutional clients. For the purposes of the relationship summary, we define a 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. General Instruction 11.C to Form CRS. 855 Some broker-dealers may be affiliated with investment advisers but are not dually registered. From Question 10 on Form BD, 2,098 (55.7%) broker-dealers report that directly or indirectly, they control, are controlled by, or are under common control with an entity that is engaged in the securities or investment advisory business. Comparatively, 2,421 (18.2%) SEC-registered investment advisers report an affiliate that is a broker-dealer in Section 7A of Schedule D of Form ADV, including 1,878 SEC-registered investment advisers that report an affiliate that is a registered broker-dealer. Approximately 77% of total regulatory assets under management of investment advisers are managed by these 2,421 SEC-registered investment advisers. 856 See Risk Management Controls for Brokers or Dealers with Market Access, Securities Exchange VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 market for broker-dealer services includes many different markets for a variety of services, including, but not limited to, managing orders for customers and routing them to various trading venues; providing advice to customers that is in connection with and reasonably related to their primary business of effecting securities transactions; holding retail customers’ funds and securities; handling clearance and settlement of trades; intermediating between retail customers and carrying/ clearing brokers; dealing in corporate debt and equities, government bonds, and municipal bonds, among others; privately placing securities; and effecting transactions in mutual funds that involve transferring funds directly to the issuer. Some broker-dealers may specialize in just one narrowly defined service, while others may provide a wide variety of services. As of December 2018, there were approximately 3,764 registered brokerdealers with over 140 million customer accounts. In total, these broker-dealers have over $4.3 trillion in total assets, which are total broker-dealer assets as reported on Form X–17a–5.857 More than two-thirds of all brokerage assets and close to one-third of all customer accounts are held by the 17 largest broker-dealers, as shown in Table 1, Panel A.858 Of the broker-dealers registered with the Commission as of December 2018, 359 broker-dealers are dually registered as investment Act Release No. 63241 (Nov. 3, 2010) [75 FR 69791 (Nov. 15, 2010)]. For simplification, we present our analysis as if the market for broker-dealer services encompasses one broad market with multiple segments, even though, in terms of competition, it could also be discussed in terms of numerous interrelated markets. 857 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. 858 Approximately $4.27 trillion of total assets of broker-dealers (99%) are at firms with total assets in excess of $1 billion. Of the 39 dually registered broker-dealers with total assets in excess of $1 billion, total assets for these dually registered broker-dealers are $2.32 trillion (54%) of aggregate broker-dealer assets. Of the remaining 99 brokerdealers with total assets in excess of $1 billion that are not dually registered, 91 have affiliated investment advisers. PO 00000 Frm 00244 Fmt 4701 Sfmt 4700 advisers.859 These firms hold over 90 million (63%) customer accounts. Approximately 539 broker-dealers (14%) report at least one type of nonsecurities business, including insurance, retirement planning, mergers and acquisitions, and real estate, among others.860 Approximately 73.5% of registered broker-dealers report retail customer activity.861 Panel B of Table 1 is limited to the broker-dealers that report some retail investor activity. As of December 2018, there are approximately 2,766 brokerdealers that served retail investors, with over $3.8 trillion in total assets (89% of total broker-dealer assets) and almost 139 million (97%) customer accounts.862 Of those broker-dealers serving retail investors, 318 are dually registered as investment advisers.863 859 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. 860 We examined Form BD filings to identify broker-dealers reporting non-securities business. For the 539 broker-dealers reporting such business, staff analyzed the narrative descriptions of these businesses on Form BD, and identified the most common types of businesses: Insurance (202), management/financial/other consulting (99), advisory/retirement planning (71), mergers and acquisitions (70), foreign exchange/swaps/other derivatives (28), real estate/property management (30), tax services (15), and other (146). Note that a broker-dealer may have more than one line of nonsecurities business. 861 The value of customer accounts is not available from FOCUS data for broker-dealers. Therefore, to obtain estimates of firm size for broker-dealers, we rely on the value of brokerdealers’ total assets as obtained from FOCUS reports. Retail sales activity is identified from Form BR, which categorizes retail activity broadly (by marking the ‘‘sales’’ box) or narrowly (by marking the ‘‘retail’’ or ‘‘institutional’’ boxes as types of sales activity). We use the broad definition of sales as we preliminarily believe that many firms will just mark ‘‘sales’’ if they have both retail and institutional activity. However, this may capture some brokerdealers that do not have retail activity, although we are unable to estimate that frequency. 862 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. 863 Of the 31 dually registered firms in the group of retail broker-dealers with total assets in excess of $500 million, total assets for these dually registered firms are nearly $2.32 trillion (60%) of aggregate retail broker-dealer assets (Table 1, Panel B). Of the remaining 81 retail broker-dealers with total assets in excess of $500 million that are not dually registered, 69 have affiliated investment advisers. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33561 TABLE 1—PANEL A: REGISTERED BROKER-DEALERS AS OF DECEMBER 2018 [Cumulative broker-dealer total assets and customer accounts] Total number of broker-dealers Size of broker-dealer (total assets) Number of dually registered broker-dealers Cumulative total assets (billion) Cumulative number of customer accounts 864 >$50 billion ................................................................................................... $1 billion to $50 billion ................................................................................. $500 million to $1 billion .............................................................................. $100 million to $500 million ......................................................................... $10 million to $100 million ........................................................................... $1 million to $10 million ............................................................................... <$1 million .................................................................................................... 17 114 35 105 490 1,021 1,982 10 22 7 19 101 130 70 $2,879 1,363 23 23 17 3.6 0.5 40,550,200 96,037,591 397,814 1,603,818 4,277,432 460,748 5,675 Total 865 866 ........................................................................................... 3,764 359 4,309 143,333,278 TABLE 1—PANEL B: REGISTERED RETAIL BROKER-DEALERS AS OF DECEMBER 2018 [Cumulative broker-dealer total assets and customer accounts] Total number of retail-facing broker-dealers jbell on DSK3GLQ082PROD with RULES2 Size of broker-dealer (total assets) Number of dually registered retail-facing broker-dealers Cumulative total assets (billion) Cumulative number of customer accounts >$50 billion ................................................................................................... $1 billion to $50 billion ................................................................................. $500 million to $1 billion .............................................................................. $100 million to $500 million ......................................................................... $10 million to $100 million ........................................................................... $1 million to $10 million ............................................................................... <$1 million .................................................................................................... 16 75 21 84 378 783 1,409 8 18 5 16 91 120 60 $2,806 990 13 18 14 2.8 0.4 40,545,792 91,991,118 365,632 1,603,818 3,762,620 450,132 5,672 Total BDs 867 ......................................................................................... 2,766 318 3,844 138,724,784 Table 868 2 reports information on brokerage commissions,869 fees, and selling concessions from the fourth quarter of 2018 for all broker-dealers, including dually-registered firms.870 We observe significant variation in sources of revenues for broker-dealers, with large broker-dealers, on average, generating substantially higher levels of commission and fee revenues than smaller broker-dealers. On average, broker-dealers, including those that are dually registered as investment advisers, earn about $5.1 million per quarter in revenue from commissions and nearly four times that amount in fees, although the Commission notes that fees encompass a variety of fees.871 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 toward commissions for broker-dealers with less than $10 million in assets and is weighted more heavily toward fees for broker-dealers with assets in excess of $10 million. For example, for the 114 864 Customer Accounts includes both brokerdealer and investment adviser accounts for duallyregistered firms. 865 The data is obtained from FOCUS filings as of December 2018. Note that there may be a doublecounting of customer accounts among, in particular, the larger broker-dealers, as they may report introducing broker-dealer accounts as well accounts in their role as clearing broker-dealers. 866 In addition to the approximately 143 million individual accounts at broker-dealers, there are approximately 302,000 omnibus accounts (0.2% of total accounts at broker-dealers), with total assets of $32.1 billion, across all 3,764 broker-dealers, of which approximately 99% are held at brokerdealers with greater than $1 billion in total assets. See also infra footnote 872. Omnibus accounts reported in FOCUS data are the accounts of noncarrying broker-dealers with carrying brokerdealers. These accounts may have securities of multiple customers (of the non-carrying firm), or securities that are proprietary assets of the noncarrying broker-dealer. We are unable to determine from the data available how many customer accounts non-carrying broker-dealers may have. The data does not allow the Commission to parse the total assets in those accounts to determine to whom such assets belong. Therefore, our estimate may be under inclusive of all customer accounts held at broker-dealers. 867 Total Broker-dealers includes all retail-facing broker-dealers, including those dual registrants that have both retail-facing broker-dealers and retailfacing investment advisers. 868 See infra footnote 1397 for how broker-dealers who engage in retail sales activity are identified. In addition to the 318 retail-facing dually registered broker-dealers, we estimate 30 broker-dealers that are registered as investment advisers but do not have a retail-facing investment advisory business. 869 Mark-ups or mark-downs are not included as part of the brokerage commission revenue in FOCUS data; instead, they are included in Net Gains or Losses on Principal Trades, but are not uniquely identified as a separate revenue category. 870 Source: FOCUS data. 871 Fees, as detailed in the FOCUS data, include fees for account supervision, investment advisory services, and administrative services. Beyond the broad classifications of fee types included in fee revenue, we are unable to determine whether fees such as 12b–1 fees, sub-accounting, or other such service fees (e.g., payments by an investment company for personal services and/or maintenance of shareholder accounts) are included. The data covers both broker-dealers and dually registered firms. FINRA’s Supplemental Statement of Income, Line 13975 (Account Supervision and Investment Advisory Services) denotes that fees earned for account supervision are those fees charged by the firm for providing investment advisory services where there is no fee charged for trade execution. Investment Advisory Services generally encompass investment advisory work and execution of client transactions, such as wrap arrangements. These fees also include fees charged by broker-dealers that are also registered with the Commodity Futures Trading Commission (‘‘CFTC’’), but do not include fees earned from affiliated entities (Item A of question 9 under Revenue in the Supplemental Statement of Income). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00245 Fmt 4701 Sfmt 4700 E:\FR\FM\12JYR2.SGM 12JYR2 33562 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations Panel A, these selling concessions are generally a smaller fraction of brokerdealer revenues than either commissions or fees, except for brokerdealers with total assets between $10 million and $100 million. For these broker-dealers, revenue from third-party selling concessions is the largest category of revenues and constitutes approximately 42% of total revenues earned by these firms. Table 2, Panel B below provides aggregate revenues by revenue type (commissions, fees, or selling broker-dealers with assets between $1 billion and $50 billion, average revenues from commissions are approximately $45 million, while average revenues from fees are approximately $225 million.872 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, concessions from sales of IC shares) for broker-dealers delineated by whether the broker-dealer is also a duallyregistered firm. Broker-dealers dually registered as investment advisers have a significantly larger fraction of their revenues from fees other than commissions or selling concessions, whereas commissions are approximately 42% of the revenues of broker-dealers that are not dually registered. TABLE 2—PANEL A: AVERAGE BROKER-DEALER REVENUES FROM REVENUE GENERATING ACTIVITIES Number of broker-dealers Size of broker-dealer in total assets Commissions Fees 873 874 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 .......................................................................................................... 17 114 35 105 490 1,021 1,982 $170,336,258 45,203,225 8,768,547 12,801,889 3,428,843 996,130 197,907 $414,300,268 225,063,257 30,141,270 33,726,336 8,950,892 1,037,825 269,459 $23,386,192 53,671,602 5,481,248 16,610,013 9,092,971 652,905 85,219 Average of All Broker-Dealers ......................................................................... 3,764 5,092,808 21,948,551 4,368,823 TABLE 2—PANEL B: AGGREGATE TOTAL REVENUES FROM REVENUE GENERATING ACTIVITIES FOR BROKER-DEALERS BASED ON DUALLY-REGISTERED STATUS Number of broker-dealers Broker-dealer type Commissions (billion) Fees 875 (billion) Sales of IC shares (billion) Dually Registered as IAs ................................................................................. Broker-Dealers ................................................................................................. 359 3,405 $4.52 4.16 $17.54 3.25 $2.63 2.57 All .............................................................................................................. 3,764 8.68 20.79 5.20 As shown in Table 3, based on responses to Form BD, broker-dealers most commonly provided business lines include private placements of securities (62.7% of broker-dealers); retail sales of mutual funds (55.4%); acting as a broker or dealer retailing corporate equity securities over the counter (52.0%); acting as a broker or dealer retailing corporate debt securities (47.2%); acting as a broker or dealer selling variable contracts, such as life insurance or annuities (41.0%); acting as a broker of municipal debt/bonds or U.S. government securities (39.8% and 37.4%, respectively); acting as an underwriter or selling group participant of corporate securities (31.2%); and investment advisory services (26.4%); among others.876 TABLE 3—LINES OF BUSINESS AT RETAIL BROKER-DEALERS AS OF DECEMBER 2018 Number of brokerdealers (total) Line of business jbell on DSK3GLQ082PROD with RULES2 Private Placements of Securities ............................................................................................................................. Mutual Fund Retailer ............................................................................................................................................... Broker or Dealer Retailing: Corporate Equity Securities OTC ..................................................................................................................... Corporate Debt Securities ................................................................................................................................ 872 A rough estimate of total fees in this size category would be 114 broker-dealers with assets between $1 billion and $50 billion multiplied by the average fee revenue of $225 million, or $25.65 billion in total fees. Divided by the number of customer accounts, not all of which may pay fees, in this size category (96,037,591), each account would be charged on average approximately $267 in fees per quarter, or $1,068 per year. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 873 Fees, as detailed in the FOCUS data, include fees for account supervision, investment advisory services, and administrative services. The data covers both broker-dealers and dually registered firms. 874The data is obtained from December 2018 FOCUS reports and averaged across size groups. 875 See id. PO 00000 Frm 00246 Fmt 4701 Sfmt 4700 Percent of brokerdealers (total) 1,735 1,533 62.7 55.4 1,438 1,306 52.0 47.2 876 Form BD requires applicants to identify the types of business engaged in (or to be engaged in) that accounts for 1% or more of the applicant’s annual revenue from the securities or investment advisory business. Table 3 provides an overview of the types of businesses listed on Form BD, as well as the frequency of participation in those businesses by registered broker-dealers as of December 2018. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33563 TABLE 3—LINES OF BUSINESS AT RETAIL BROKER-DEALERS AS OF DECEMBER 2018—Continued Number of brokerdealers (total) Line of business Variable Contracts ............................................................................................................................................ Municipal Debt/Bonds—Broker ................................................................................................................................ U.S. Government Securities Broker ........................................................................................................................ Put and Call Broker or Dealer or Options Writer .................................................................................................... Underwriter or Selling Group Participant—Corporate Securities ............................................................................ Non-Exchange Member Arranging for Transactions in Listed Securities by Exchange Member .......................... Investment Advisory Services ................................................................................................................................. Broker or Dealer Selling Tax Shelters or Limited Partnerships—Primary Market .................................................. Trading Securities for Own Account ........................................................................................................................ Municipal Debt/Bonds—Dealer ................................................................................................................................ U.S. Government Securities—Dealer ...................................................................................................................... Solicitor of Time Deposits in a Financial Institution ................................................................................................ Underwriter—Mutual Funds ..................................................................................................................................... Broker or Dealer Selling Interests in Mortgages or Other Receivables .................................................................. Broker or Dealer Selling Oil and Gas Interests ....................................................................................................... Broker or Dealer Making Inter-Dealer Markets in Corporate Securities OTC ........................................................ Broker or Dealer Involved in Networking, Kiosk, or Similar Arrangements (Banks, Savings Banks, Credit Unions) ................................................................................................................................................................. Internet and Online Trading Accounts ..................................................................................................................... Exchange Member Engaged in Exchange Commission Business Other than Floor Activities .............................. Broker or Dealer Selling Tax Shelters or Limited Partnerships—Secondary Market ............................................. Commodities ............................................................................................................................................................ Executing Broker ..................................................................................................................................................... Day Trading Accounts ............................................................................................................................................. Broker or Dealer Involved in Networking, Kiosk, or Similar Arrangements (Insurance Company or Agency) ...... Real Estate Syndicator ............................................................................................................................................ Broker or Dealer Selling Securities of Non-Profit Organizations ............................................................................ Exchange Member Engaged in Floor Activities ...................................................................................................... Broker or Dealer Selling Securities of Only One Issuer or Associate Issuers ....................................................... Prime Broker ............................................................................................................................................................ Crowdfunding FINRA Rule 4518(a) ......................................................................................................................... Clearing Broker in a Prime Broker .......................................................................................................................... Funding Portal ......................................................................................................................................................... Crowdfunding FINRA Rule 4518(b) ......................................................................................................................... Number of Retail-Facing Broker-Dealers ................................................................................................................ (1) Disclosures for Broker-Dealers jbell on DSK3GLQ082PROD with RULES2 As discussed above, broker-dealers register with and report information, including about their business, affiliates, and disciplinary history, to the Commission, Self-Regulatory Organizations (‘‘SROs’’), and other jurisdictions through Form BD.877 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.878 Broker-dealers report whether a brokerdealer or any of its control affiliates 877 See Proposing Release, supra footnote 5, at Section IV.A.1.i.; see also generally Form BD. 878 See generally Form BD. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 have been subject to criminal prosecutions, regulatory actions, or civil actions in connection with any investment-related activity, as well as certain financial matters.879 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.880 In addition, firms report similar information and additional information to FINRA pursuant to FINRA Rule 4530.881 A significant amount of information concerning broker-dealers and their 879 See Item 11 and Disclosure Reporting Pages of Form BD. 880 See Exchange Act rule 15b3–1(a). 881 See Proposing Release, supra footnote 5, at Section II.B.7. 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). PO 00000 Frm 00247 Fmt 4701 Sfmt 4700 Percent of brokerdealers (total) 1,132 1,101 1,035 993 862 785 730 619 614 475 339 308 237 216 207 207 40.9 39.8 37.4 35.9 31.2 28.4 26.4 22.4 22.2 17.2 12.3 11.1 8.6 7.8 7.5 7.5 197 192 171 164 162 107 89 88 94 71 61 43 21 21 14 8 5 2,766 7.1 6.9 6.2 5.9 5.9 3.9 3.2 3.2 3.4 26 2.2 1.6 0.8 0.8 0.5 0.3 0.2 associated natural persons, including information from Form BD, Form BDW, and Forms U4, U5, and U6, is publicly available through FINRA’s BrokerCheck system.882 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.883 882 FINRA Rule 8312 governs the information FINRA releases to the public via BrokerCheck. See Proposing Release, supra footnote 5, at n.280. 883 See Proposing Release, supra footnote 5, at Section II.B.7. E:\FR\FM\12JYR2.SGM 12JYR2 33564 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations Broker-dealers are subject to other disclosure obligations 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.884 Disclosure has also been a feature of other regulatory efforts related to financial services, including certain FINRA rules.885 b. Investment Advisers As discussed above, SEC-registered investment advisers that offer services to retail investors will be subject to the final rule. In addition, although not required to comply with the final rule, state-registered investment advisers will also be affected, because the final rule will impact the competitive landscape in the market for the provision of financial advice.886 This section first discusses SEC-registered investment advisers, followed by a discussion of state-registered investment advisers. As of December 2018, there are approximately 13,300 investment advisers registered with the Commission. The majority of SECregistered investment advisers report that they provide portfolio management services for individuals and small businesses.887 Of all SEC-registered investment advisers, 359 identify themselves as dually registered broker-dealers.888 Further, 2,421 investment advisers (18%) report an affiliate that is a brokerdealer, including 1,878 investment advisers (14%) that report an SECregistered broker-dealer affiliate.889 As shown in Panel A of Table 4 below, in aggregate, investment advisers have over $84 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, the total number of accounts for investment advisers is only 29% of the number of customer accounts for broker-dealers. Based on staff analysis of Form ADV data as of December 2018, approximately 62% of registered investment advisers (8,235) have some portion of their business dedicated to retail investors, including both high net worth and non-high net worth individual clients,890 as shown in Panel B of Table 4.891 In total, these firms have approximately $41.4 trillion of assets under management.892 Approximately 8,200 registered investment advisers (61%) serve over 32 million non-high net worth individual clients and have approximately $4.8 trillion in assets under management, while approximately 8,000 registered investment advisers (60%) serve approximately 4.8 million high net worth individual clients with $6.15 trillion in assets under management.893 TABLE 4—PANEL A: REGISTERED INVESTMENT ADVISERS (RIAS) AS OF DECEMBER 2018 [Cumulative RIA Assets Under Management (AUM) and Accounts] jbell on DSK3GLQ082PROD with RULES2 Size of investment adviser (AUM) Number of RIAs Number of dually registered RIAs Cumulative AUM (billion) Cumulative number of accounts >$50 billion ....................................................................................................... $1 billion to $50 billion ..................................................................................... $500 million to $1 billion .................................................................................. $100 million to $500 million ............................................................................. $10 million to $100 million ............................................................................... $1 million to $10 million ................................................................................... <$1 million ........................................................................................................ 270 3,453 1,635 5,927 1,070 162 782 15 121 47 119 24 3 30 $59,264 22,749 1,151 1,397 59 0.8 0.02 20,655,756 13,304,154 1,413,099 5,135,070 310,031 69,664 13,976 Total .......................................................................................................... 13,299 359 84,621 41,081,750 884 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 1167, 1172 (1970); SEC v. Hasho, 784 F. Supp. 1059, 1110 (S.D.N.Y. 1992); In the Matter of RichMark Capital Corp., Exchange Act Release No. 48758 (Nov. 7, 2003) (‘‘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). 885 See FINRA Requests Comment on Concept Proposal to Require a Disclosure Statement for Retail Investors at or Before Commencing a Business Relationship, FINRA Regulatory Notice 10–54 (Oct. 2010). 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 section 15(b)(8) of the Exchange Act and Exchange Act rule 15b9–1. FINRA is the sole national securities association registered with the SEC under section 15A of the Exchange Act. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 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 to, FINRA Rules 2210(d)(2) (communications with the public), 2260 (disclosures), 2230 (customer account statements and confirmations), and 2270 (day-trading risk disclosure statement). 886 In addition to SEC-registered investment advisers, which are the focus of this section, this rule could also affect banks, trust companies, insurance companies, and other providers of financial advice. 887 Of the approximately 13,300 SEC-registered investment advisers, 8,410 (63.24%) report in Item 5.G.(2) of Form ADV that they provide portfolio management services for individuals and/or small businesses. In addition, there are approximately 17,300 state-registered investment advisers, of which 125 are also registered with the Commission. Approximately 13,900 state-registered investment advisers are retail facing (see Item 5.D. of Form ADV). PO 00000 Frm 00248 Fmt 4701 Sfmt 4700 888 See supra footnote 861 and accompanying text. 889 Item 7.A.1. of Form ADV. on individual clients obtained from Form ADV may not necessarily correspond to data on ‘‘retail customers’’ as defined in this rule because the data in Form ADV regarding individual clients does not involve any test of use for personal, family, or household purposes. 891 We use the responses to Items 5.D.(a)(1), 5.D.(a)(3), 5.D.(b)(1), and 5.D.(b)(3) of Part 1A of Form ADV. If at least one of these responses was filled out as greater than 0, the firm is considered as providing business to retail investors. Part 1A of Form ADV. 892 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. 893 Estimates are based on IARD system data as of December 31, 2018. The AUM reported here is specifically that of those non-high net worth clients. Of the 8,235 investment advisers serving retail investors, 318 are also dually registered as brokerdealers. 890 Data E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33565 TABLE 4—PANEL B: RETAIL REGISTERED INVESTMENT ADVISERS (RIAS) AS OF DECEMBER 2018 [Cumulative RIA Assets Under Management (AUM) and accounts] Size of investment adviser (AUM) Number of RIAs Number of dually registered RIAs Cumulative AUM (billion) Cumulative number of accounts >$50 billion ................................................................................................... $1 billion to $50 billion ................................................................................. $500 million to $1 billion .............................................................................. $100 million to $500 million ......................................................................... $10 million to $100 million ........................................................................... $1 million to $10 million ............................................................................... <$1 million .................................................................................................... 119 1,614 1,007 4,548 706 102 169 14 111 44 113 23 3 10 $30,291 9,570 700 1,026 40 0.5 0.02 20,592,326 13,224,188 1,392,842 5,287,584 308,285 69,534 13,946 Total RIAs 894 ........................................................................................ 8,235 318 41,434 40,887,325 In addition to SEC-registered investment advisers, other investment advisers are registered with state regulators.895 As of December 2018, there are 17,268 state-registered investment advisers,896 of which 125 are also registered with the Commission. Of the state-registered investment advisers, 204 are dually registered as brokerdealers, while approximately 4.6% (786) report a broker-dealer affiliate. In aggregate, state-registered investment advisers have approximately $334 billion in AUM. Eighty-two percent of state-registered investment advisers report that they provide portfolio management services for individuals and small businesses, compared to just 63% for Commission-registered investment advisers. Approximately 81% of stateregistered investment advisers (13,927) have some portion of their business dedicated to retail investors,897 and in aggregate, these firms have approximately $324 billion in AUM.898 Approximately 13,910 (81%) stateregistered advisers serve 14 million nonhigh net worth retail clients and have approximately $137 billion in AUM, while 11,497 (67%) state-registered advisers serve approximately 170,000 high net worth retail clients with approximately $169 billion in AUM.899 Table 5 details the compensation structures employed by approximately 13,000 SEC-registered investment advisers. Approximately 96% 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, in addition to fee-based compensation, including fixed fees, hourly charges, and performance based fees. Less than 4% of investment advisers charge commissions 900 to their investors. TABLE 5—REGISTERED INVESTMENT ADVISERS COMPENSATION BY TYPE Compensation type Yes jbell on DSK3GLQ082PROD with RULES2 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 ...................................................................................................................................................................... 12,678 3,914 122 5,800 454 4,938 1,899 No 614 9,378 13,170 7,492 12,838 8,354 11,393 As discussed above, many investment advisers participate in wrap fee programs. As of December 31, 2018, more than 8.5% of the SEC-registered investment advisers sponsor a wrap fee program and more than 13.1% act as a portfolio manager for one or more wrap 894 Total RIAs (1) includes all retail-facing investment advisers, including those dual registrants that have retail-facing investment advisers and retail-facing broker-dealers. 895 Item 2.A. of Part 1A of Form ADV and the Advisers Act rules 203A–1 and 203A–2 require 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; (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) receives an order permitting the adviser to register with the Commission. Although the statutory threshold is $100 million, the SEC raised the threshold to $110 million to provide a buffer for mid-sized advisers with assets under management close to $100 million to determine whether and when to switch between state and Commission registration. Advisers Act rule 203A–1(a). 896 There are 70 investment advisers with latest reported regulatory assets under management in excess of $110 million but that are not listed as registered with the SEC. None of these 70 investment advisers has exempted status with the Commission. For the purposes of this rulemaking, these are considered potentially erroneous submissions 897 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. Part 1A of Form ADV. 898 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. 899 Estimates are based on IARD system data as of February 10, 2018. The AUM reported here is specifically that of those non-high net worth investors. Of the 13,927 state-registered investment advisers serving retail investors, 134 may also be dually registered as broker-dealers. 900 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. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00249 Fmt 4701 Sfmt 4700 E:\FR\FM\12JYR2.SGM 12JYR2 33566 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations fee programs.901 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. (1) Disclosures for Investment Advisers As discussed more fully in the Fiduciary Release, investment advisers have a duty to provide full and fair disclosure of all material facts about the advisory relationship to their clients as well as to obtain informed consent from their clients. 902 SEC- and stateregistered investment advisers are also subject to express disclosure requirements in Form ADV. 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.903 Part 1 of Form ADV provides information to regulators about the jbell on DSK3GLQ082PROD with RULES2 901 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. 902 See Fiduciary Release supra footnote 47. 903 See Advisers Act rules 203–1 and 204–1. Part 1 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 footnote 576. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 registrants’ ownership, investors, and business, and it is made available to clients, prospective clients, and the public. 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,904 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.905 The Part 2A brochure 904 Part 2A of Form ADV contains 18 mandatory disclosure items about the advisory firm, including information about an adviser’s: (i) Range of fees; (ii) methods of analysis; (iii) investment strategies and risk of loss; (iv) brokerage, including trade aggregation polices and directed brokerage practices, as well as the use of soft dollars; (v) review of accounts; (vi) client referrals and other compensation; (vii) disciplinary history; and (viii) 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 footnote 576. 905 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 General Instruction 5 to Form ADV. Registrants are not required to file Part 2B (brochure supplement) electronically, but must preserve a copy of the supplement(s) and make the copy available upon request. PO 00000 Frm 00250 Fmt 4701 Sfmt 4700 is the primary client-facing disclosure document,906 however, Parts 1 and 2A are both made publicly available by the Commission through IAPD,907 and advisers are generally required to deliver Part 2A and Part 2B to their clients. c. Trends in the Relative Numbers of Providers of Financial Services Over time, the relative number of broker-dealers and investment advisers has changed. Figure 1 presented below shows the time series trend of growth in broker-dealers and SEC-registered investment advisers between 2005 and 2018. Over the last 14 years, the number of broker-dealers has declined from over 6,000 in 2005 to less than 4,000 in 2018, while the number of investment advisers has increased from approximately 9,000 in 2005 to over 13,000 in 2018. This change in the relative numbers of broker-dealers and investment advisers over time likely affects the competition for advice, and potentially alters the choices available to retail investors regarding how to receive or pay for such advice, the nature of the advice, and the attendant conflicts of interest. BILLING CODE 8011–01–P 906 See Brochure Adopting Release, supra footnote 576. 907 See Investment Adviser Public Disclosure, available at https://adviserinfo.sec.gov/. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33567 Figure 1: Time Series of the Number of SEC-Registered Investment Advisers and Broker-Dealers (2005-2018) 14,000 - 12,000 10,000 / """ -~ ...........--- 8,000 --- --- .. ___ 6,000 4,000 ._ ___ ----- --. 2,000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00251 Fmt 4701 - Sfmt 4725 - Broker-Dealers E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.003</GPH> jbell on DSK3GLQ082PROD with RULES2 -Investment Advisers 33568 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations An increase in the number of investment advisers and a decrease 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,908 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. 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 that provide a steady source of revenue rather than accounts that charge commissions and are dependent on transactions.909 Broker-dealers have jbell on DSK3GLQ082PROD with RULES2 908 See Hester Peirce, Dwindling Numbers in the Financial Industry, Brookings Center on Markets and Regulation Report (May 15, 2017), at 5, 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. 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, National Futures Association, or the MSRB. 909 See id. at 7. Beyond Commission observations, the Brookings Report also discusses the shift from broker-dealer to investment advisory business models for retail investors. Declining transactionbased revenue due to declining commission rates VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 indicated that the following factors have contributed to this migration: Provision of revenue stability or increase in profitability,910 perceived lower and competition from discount brokerage firms has made fee-based products and services more attractive to providers of such products and services. Although discount brokerage firms generally provide execution-only services and do not compete directly in the advice market with full service broker-dealers and investment advisers, entry by discount brokers has contributed to lower commission rates throughout the broker-dealer industry. Further, fee-based activity generates a steady stream of revenue regardless of the customer trading activity, unlike commission-based accounts; see also Angela A. Hung, et al., Investor and Industry Perspectives on Investment Advisers and Broker-Dealers, RAND Institute for Civil Justice Technical Report (2008), available at https:// www.rand.org/content/dam/rand/pubs/technical_ reports/2008/RAND_TR556.pdf (‘‘RAND 2008’’), which discusses a shift from transaction-based to fee-based brokerage accounts prior to recent regulatory changes. 910 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., The Jones Financial Companies, L.L.L.P., Form 10–K (Mar. 14, 2019), available at https://www.sec.gov/Archives/edgar/data/815917/ 000156459019007788/ck0000815917-10k_ 20181231.htm; Raymond James Financial, Inc., Form 10–K (Nov. 21, 2018), available at https:// www.sec.gov/Archives/edgar/data/720005/ 000072000518000083/rjf-20180930x10k.htm; Stifle Financial Corp., Form 10–K (Feb. 20, 2019), available at https://www.sec.gov/Archives/edgar/ data/720672/000156459019003474/sf-10k_ 20181231.htm; Wells Fargo & Co., 10–K (Feb. 27, 2019) available at https://www.sec.gov/Archives/ edgar/data/72971/000007297119000227/wfc12312018x10k.htm; and Ameriprise Financial Inc., Form 10–K (Feb. 23, 2018), available at https:// www.sec.gov/Archives/edgar/data/820027/ 000082002718000008/amp12312017.htm. 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 PO 00000 Frm 00252 Fmt 4701 Sfmt 4700 regulatory burden, and provisions of more services to retail customers.911 Further, there has been a substantial increase in the number of retail clients of 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 nonhigh 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 clients, there has been a pronounced increase in AUM since 2012, although AUM has leveled off since 2015. 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 Hugh Son, 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 Lisa Beilfuss & 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/. 911 See Regulation Best Interest Release, supra footnote 47, at Section III.B.2.e.ii, which discusses industry trends. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33569 Figure 2: Time Series of the Number of Retail Clients of Investment Advisers (2010- 2018) 35,000,000 - 30,000,000 25,000,000 I ' "' 20,000,000 15,000,000 ""'- - _.,.,..,.-- ~ ~ 10,000,000 _ _ _ _ _ _ _ _ _ ,__1/1111111*_ .... 5,000,000 --- 2010-09 2011-09 2012-09 2013-09 2014-09 2015-09 2016-09 2017-09 2018-09 -Estimated Non-HNW Clients Estimated HNW dients Figure 3: Time Series of the Retail Clients of Investment Advisers Assets under Management (2010- 2018) 8,000,000,000,000 7,000,000,000,000 6,000,000,000,000 5,000,000,000,000 4,000,000,000,000 , ,' ,' -- _, ... .... .... '"'-'\.._.~'~ ... .---~ --- - ~ 3,000,000,000,000 2,000,000,000,000 -Estimated Non-HNW Client RAUM VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00253 Fmt 4701 - Sfmt 4700 - Estimated HNW Client RAUM E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.005</GPH> 2010-09 2011-09 2012-09 2013-09 2014-09 2015-09 2016-09 2017-09 2018-09 ER12JY19.004</GPH> jbell on DSK3GLQ082PROD with RULES2 1,000,000,000,000 33570 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations BILLING CODE 8011–01–C d. Registered Representatives of BrokerDealers, 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 SRO (‘‘registered representatives’’).912 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.913 We estimate the number of registered representatives and registered IARs, including dually registered financial professionals, (together ‘‘registered financial professionals’’) at brokerdealers, 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.914 We only consider employees at firms who have retail- facing business, as defined previously.915 We observe in Table 6 that approximately 60% of registered financial professionals are employed by dually registered entities. The percentage varies by the size of the firm. For example, in firms with total assets between $1 billion and $50 billion, 67% of all registered financial professionals are employed by dually registered firms. Focusing on dually registered firms only, approximately 62.7% of total licensed representatives at these firms are dually registered financial professionals, approximately 36.9% are only registered representatives; and less than one percent are only registered investment adviser representatives. TABLE 6—TOTAL REGISTERED REPRESENTATIVES AT BROKER-DEALERS, INVESTMENT ADVISERS, AND DUALLY REGISTERED FIRMS WITH RETAIL INVESTORS jbell on DSK3GLQ082PROD with RULES2 Size of firm (total assets for standalone BDs and dually registered firms; AUM for standalone IAs) Total number of reps. % of reps. in dually registered firms % of reps. in standalone BD w/an IA affiliate % of reps. in standalone BD w/o an IA affiliate % of reps. in standalone IA w/a BD affiliate % reps. in standalone IA w/o a BD affiliate >$50 billion ........................................... $1 billion to $50 billion ......................... $500 million to $1 billion ...................... $100 million to $500 million ................. $10 million to $100 million ................... $1 million to $10 million ....................... <$1 million ............................................ 84,461 170,256 29,874 66,924 106,178 33,790 12,522 73 67 71 51 55 35 8 7 11 5 27 42 54 52 0 0 1 0 1 11 36 19 15 7 4 1 0 3 1 7 16 18 1 0 1 Total Licensed Representatives 916 ...................................... 504,005 60 23 2 9 6 In Table 7 below, we estimate the number of employees who are registered representatives, registered investment adviser representatives, or both (‘‘dually registered representatives’’).917 Similar to Table 6, 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.918 In Table 7, approximately 25% of registered employees at registered broker-dealers or investment advisers are dually registered representatives. However, this proportion varies significantly across size categories. For example, for firms with total assets between $1 billion and $50 billion,919 approximately 35% of all registered employees are both registered representatives and investment adviser 912 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, 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. 913 See 17 CFR 275.203A–3. However, the data on numbers of registered IARs may undercount the number of supervised persons of investment advisers who provide investment advice to retail investors because not all supervised persons who provide investment advice to retail investors are required to register as IARs. For example, Commission rules exempt from IAR registration supervised persons who provide advice only to non-individual clients or to individuals that meet the definition of ‘‘qualified client.’’ In addition, state securities authorities may impose different criteria for requiring registration as an investment adviser representative. 914 We calculate these numbers based on Form U4 filings. Representatives of broker-dealers, investment advisers, and issuers of securities must file this form when applying to become registered in appropriate jurisdictions and with SROs. Firms and representatives have an obligation to amend and update information as changes occur. Using the examination information contained in the form, we consider an employee a 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 for an RR or IAR. 915 See supra footnotes 864 and 893. 916 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. 917 We calculate these numbers based on Form U4 filings. 918 See supra footnotes 864 and 893. 919 Firm size is defined as total assets from the balance sheet for broker-dealers and dually registered firms (source: FOCUS reports) and as assets under management for investment advisers (source: Form ADV). We are unable to obtain customer assets for broker-dealers, and for investment advisers. We can only obtain information from Form ADV as to whether the firm assets exceed $1 billion. We recognize that our approach of using firm assets for broker-dealers and customer assets for investment advisers does not allow for direct comparison; however, our objective is to provide measures of firm size and not to make comparisons between broker-dealers and investment advisers based on firm size. Across both broker-dealers and investment advisers, larger firms, regardless of whether we stratify on firm total assets or assets under management, have more customer accounts, are more likely to be dually registered, and have more representatives or employees per firm, than smaller broker-dealers or investment advisers. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00254 Fmt 4701 Sfmt 4700 E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations representatives. In contrast, for firms with total assets below $1 million, 13% 33571 of all employees are dually registered representatives. TABLE 7—EMPLOYEES AT RETAIL FACING FIRMS WHO ARE REGISTERED REPRESENTATIVES, INVESTMENT ADVISER REPRESENTATIVES, OR BOTH Size of firm (total assets for standalone BDs and dually registered firms; AUM for standalone IAs) Percentage of dually registered representatives Percentage of registered representatives only Percentages of IARs only >$50 billion ................................................................................................... $1 billion to $50 billion ................................................................................. $500 million to $1 billion .............................................................................. $100 million to $500 million ......................................................................... $10 million to $100 million ........................................................................... $1 million to $10 million ............................................................................... <$1 million .................................................................................................... 218,539 328,842 43,211 119,214 176,559 56,230 18,334 19 35 18 23 20 17 13 16 12 40 24 39 39 46 1 4 10 9 1 1 3 Total Employees at Retail Facing Firms 920 ......................................... 960,929 25 23 4 Approximately 87% 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,921 87.6% of registered investment adviser representatives were dually registered as registered representatives as of midOctober 2010.922 In contrast, approximately 52% of registered representatives were dually registered as investment adviser representatives at the end of 2018.923 Broker-dealers and investment advisers must report certain criminal, regulatory, and civil actions and complaint information and information about certain financial matters in Forms jbell on DSK3GLQ082PROD with RULES2 Total number of employees 920 See supra footnotes 918 and 919. Note that all percentages in the table have been rounded to the nearest whole percentage point. 921 See Staff of the 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), available at www.sec.gov/news/studies/2011/913studyfinal.pdf (‘‘913 Study’’). 922 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. 923 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 firms 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. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 U4 924 and U5 925 for their representatives. SROs, regulators and jurisdictions report disclosure events on Form U6.926 FINRA’s BrokerCheck system and IAPD discloses to the public certain information on registered representatives and investment adviser representatives, respectively, such as principal place of business, business activities, owners, and criminal prosecutions, regulatory actions, and civil actions in connection with any investment-related activity. e. 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. The OIAD/ RAND survey estimates that approximately 73% of adults live in a household that invests.927 The survey indicates that non-investors are more likely to be female, to have lower family income and educational attainment, and to be younger than investors.928 924 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. 925 Form U5 requires information about representatives’ termination from their employers. 926 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. 927 See OIAD/RAND, supra footnote 3 (defining ‘‘investors’’ as persons ‘‘owning at least one type of investment account, (e.g., an employer-sponsored retirement account, a non-employer sponsored retirement account such as an IRA, a college savings investment account, or some other type of investment account such as a brokerage or advisory account), or owning at least one type of investment asset (e.g., mutual funds, exchange-traded funds or other funds, individual stocks, individual bonds, derivatives, and annuities)’’). 928 OIAD/RAND, supra footnote 3. PO 00000 Frm 00255 Fmt 4701 Sfmt 4700 Approximately 35% of households that do invest do so through accounts such as broker-dealer or advisory accounts.929 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. According to the Investment Company Institute (‘‘ICI’’), as of December 2016, nearly $24.2 trillion is invested in retirement accounts, of which $7.5 trillion is in IRAs.930 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).931 With respect to IRA accounts, one commenter, the ICI, documents that 43 million U.S. households own either traditional or Roth IRAs and that approximately 70% are held with financial professionals, with the remainder being direct market.932 929 Id.. 930 See Sarah Holden & Daniel Schrass, The Role of IRAs in US Households’ Saving for Retirement, 2016, 23 ICI Res. Persp. 23–1 (Jan. 2017), available at https://www.ici.org/pdf/per23-01.pdf. 931 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 account. See Board of Governors of the Federal Reserve System, Survey of Consumer Finances (2016), available at https:// www.federalreserve.gov/econres/scfindex.htm. The SCF 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. 932 See Sarah Holden & Daniel Schrass, The Role of IRAs in U.S. Households’ Saving for Retirement, 2018, ICI Res. Persp. 24–10 (Dec. 2018), available at https://www.ici.org/pdf/per24-10.pdf. E:\FR\FM\12JYR2.SGM 12JYR2 33572 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations Further, ICI finds that approximately 64% of households have aggregate IRA (traditional and Roth) balances of less than $100,000, and approximately 36% of investors have balances below $25,000. As noted in one study, the growth of assets in traditional IRAs comes from rollovers from workplace retirement plans; for example, 58% of traditional IRAs consist of rollover assets, and contributions due to rollovers exceeded $460 billion in 2015 (the most recently available data).933 While the number of retail investors obtaining services from investment advisers and the aggregate value of associated assets under management has increased, the OIAD/RAND study also suggests that the general willingness of investors to use planning or to take financial advice regarding strategies, products, or accounts is relatively fixed over time.934 With respect to the account assets associated with retail investors, the OIAD/RAND survey also estimates that approximately 10% of investors who have broker-dealer or advisory accounts hold more than $500,000 in assets, while approximately 47% hold $50,000 in assets or less. Altogether, many investors who have brokerage or advisory accounts trade infrequently, with approximately 31% reporting no annual transactions and an additional approximately 30% reporting three or fewer transactions per year.935 With respect to particular products, commenters have provided us with additional information about ownership of mutual funds and IRA account statistics. For example, ICI stated that 56 million U.S. households and nearly 100 million individual investors own mutual funds, of which 80% are held through 401(k) and other workplace retirement plans, while 63% of investors hold mutual funds outside of those plans.936 Of those investors that own mutual funds outside of workplace retirement plans, approximately 50% rely on financial professionals, while nearly one-third purchase direct-sold funds either directly from the fund company or through a discount broker.937 Table 8 below provides an overview of account ownership segmented by account type (e.g., IRA, brokerage, or both) and investor income category based on the SCF.938 TABLE 8—OWNERSHIP BY ACCOUNT TYPE IN THE U.S. BY INCOME GROUP [As reported by the 2016 SCF] % Brokerage only Income category % Both brokerage and IRA Bottom 25% ................................................................................................................................. 25%–50% ..................................................................................................................................... 50%–75% ..................................................................................................................................... 75%–90% ..................................................................................................................................... Top 10% ...................................................................................................................................... 1.2 3.2 4.1 7.5 12.0 7.6 14. 21.4 33.4 24.7 2.4 5.4 11.4 16.5 43.9 Average ................................................................................................................................ 4.4 18.3 11.6 With respect to the nature of the accounts held by investors and whether they are managed by financial professionals, the OIAD/RAND survey finds that 36% of its sample of participants report that they currently use a financial professional and approximately 33% receive some kind of recommendation service.939 Of the subset of those investors who report holding a brokerage, advisory, or similar account, approximately 33% self-direct their own account, 25% have their account managed by a financial professional, and 10% have their account advised by a professional.940 For those investors who take financial advice, the OIAD/RAND study suggests 933 See id. 934 OIAD/RAND, jbell on DSK3GLQ082PROD with RULES2 % IRA only supra footnote 3 (noting that this conclusion was limited by the methodology of comparing participants in a 2007 survey with those surveyed in 2018). 935 OIAD/RAND, supra footnote 3. 936 See ICI Letter; see also Sarah Holden, Daniel Schrass & Michael Bogdan, Ownership of Mutual Funds, Shareholder Sentiment, and Use of the internet, 2018, ICI Res. Persp. 24–8 (Nov. 2018), available at https://www.ici.org/pdf/per24-08.pdf. 937 See id. 938 Id. To the extent that investors have IRA accounts at banks that are not also registered as broker-dealers, our data may overestimate the VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 that they may differ in characteristics from other investors. Investors who take financial advice are generally older, retired, and have a higher income than other investors, but also may have lower educational attainment (e.g., high school or less) than other investors.941 Similarly, 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.942 Panel A of Table 8 below presents the breakdown of where households who have brokerage accounts seek advice about savings and investments. The table shows that of those respondents with brokerage accounts, 23% (4.7 million households) use advice services of broker-dealers for savings and investment decisions, while 49% (7.8 million households) take advice from a ‘‘financial planner.’’ Approximately 36% (7.2 million households) seek advice from other sources such as bankers, accountants, and lawyers. Almost 25% (5.0 million households) do not use advice from the above sources. Panel B of Table 9 below presents the breakdown of advice received for numbers of IRA accounts held by retail investors that could be subject to this rulemaking. 939 OIAD/RAND, supra footnote 3. In a focus group preceding the survey, focus group participants provided a number of reasons for not using a financial professional in making investments, including being unable or unwilling to pay the fees, doing their own financial research, being unsure of how to work with a professional, and being concerned about professionals selling products without attending to investors’ plans and goals. 940 Id. 941 Id. 942 The SCF, supra footnote 931, specifically asks participants ‘‘Do you get advice from a friend, relative, lawyer, accountant, banker, broker, or financial planner? Or do you do something else?’’ (see Federal Reserve, Codebook for 2016 Survey of Consumer Finances (2016), available at https:// www.federalreserve.gov/econres/files/ codebk2016.txt). Other response choices presented by the survey include ‘‘Calling Around,’’ ‘‘Magazines,’’ ‘‘Self,’’ ‘‘Past Experience,’’ ‘‘Telemarketer,’’ and ‘‘Insurance Agent,’’ as well as 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 does not specifically include ‘‘investment adviser.’’ PO 00000 Frm 00256 Fmt 4701 Sfmt 4700 E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations households who have an IRA. 15% (5.7 million households) rely on advice services of their broker-dealers and 48% (18.3 million households) obtain advice from financial planners. Approximately 41% (15.5 million households) seek advice from bankers, accountants, or lawyers, while the 25% (9.5 million 33573 households) use no advice or seek advice from other sources. TABLE 9—PANEL A: SOURCES OF ADVICE FOR HOUSEHOLDS WHO HAVE A BROKERAGE ACCOUNT IN THE U.S. BY INCOME GROUP 943 % 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 9—PANEL B: SOURCES OF ADVICE FOR HOUSEHOLDS WHO HAVE AN IRA IN THE U.S. BY INCOME GROUP 944 % Taking advice from brokers Income category % 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 The OIAD/RAND survey notes that for survey participants who reported working with a specific individual for investment advice, 70% work with a dually registered firm, 5.4% with a broker-dealer, and 5.1% with an investment adviser.945 2. Investor Perceptions About the Marketplace for Financial Services and Disclosures Our proposal discussed a number of studies providing information on investors’ perceptions of the market for financial services and advice, including those conducted by Siegel & Gale 946 in 2005, RAND 947 in 2008 and CFA in 2010.948 Commenters to the proposal provided their own studies or survey evidence conducted by third party research firms, which we have 943Id. 944Id. jbell on DSK3GLQ082PROD with RULES2 % Taking advice from financial planners 945 OIAD/RAND, supra footnote 3. As documented by OIAD/RAND, retail investors surveyed had difficulty in accurately identifying the type of relationship that they have with their financial professional. 946 Proposing Release, supra footnote 5, at n.555. 947 Id., at n.556. 948 Id., at n.557. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 discussed throughout the release.949 In addition, the Commission’s Office of the Investor Advocate collaborated with RAND to prepare the OIAD/RAND study,950 which included focus groups and a survey about the retail market for investor advice. The Commission’s Office of the Investor Advocate also engaged RAND to conduct investor testing of the proposed relationship summary using the dual registrant sample in the proposal. The report, RAND 2018,951 discusses both larger sample survey results and smaller sample in-depth interview results. Finally, the proposal solicited public supra footnotes 17–21. consisted of focus group discussions with 35 participants in total. OIAD/ RAND caveats in its report that the participants in its focus groups were neither nationally representative nor randomly selected and that their results are anecdotal. OIAD/RAND also included a nationally representative probability based survey to allow researchers to reliably construct population estimates. OIAD/RAND, supra footnote 3. 951 For RAND 2018, a sample of 1,816 individuals from the ALP Survey Panel were invited to complete the survey, and 1,460 (80.4%) actually completed the survey. 26% of respondents are categorized as non-investor. Median time spent going through the initial five screens of the relationship summary text was 4 minutes. RAND 2018, supra footnote 13. PO 00000 949 See 950 OIAD/RAND Frm 00257 Fmt 4701 Sfmt 4700 feedback from individual investors on a feedback form issued with the Proposing Release.952 Responses and data from these sources inform our understanding of how investors approach the marketplace for financial services and how investors respond to disclosures about financial services generally. a. 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.953 For instance, the RAND 2008 study reported that 46% of survey respondents indicated that they located a financial professional from personal referral, although this percentage varied 952 Proposing Release, supra footnote 5; see also Feedback Forms Comment Summary, supra footnote 13. More than 90 individuals answered with a response or comment relevant to at least one of the questions on the form, using an online version of the feedback form or by submitting a copy of the feedback form to the comment file in PDF format. 953 See RAND 2008, supra footnote 912; 917 Financial Literacy Study, supra footnote 589. E:\FR\FM\12JYR2.SGM 12JYR2 33574 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations depending on the type of service provided (e.g., only 35% of survey participants used personal referrals for brokerage services). After personal referrals, RAND 2008 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 2008 study separately inquired about locating a financial firm,954 in which respondents reported selecting a 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.955 In the 917 Financial Literacy Study,956 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. The OIAD/RAND focus group study notes that among the factors that group participants report for not working with a financial professional was participants being unsure how they would go about working with a professional.957 jbell on DSK3GLQ082PROD with RULES2 b. Investor Confusion As discussed in the Proposing Release and by commenters to the proposal, many sources indicate that retail 954 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. 955 See 917 Financial Literacy Study, supra footnote 589. 956 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. 957 OIAD/RAND, supra footnote 3. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 investors do not understand or find confusing the distinctions between broker-dealers and investment advisers, particularly in terms of services provided and applicable standards of conduct.958 Studies such as those conducted by Siegel & Gale 959 in 2005, RAND 960 in 2008, and CFA in 2010,961 discussed in the Proposing Release, support findings that retail investors are confused about the roles and titles of financial professionals. The OIAD/RAND study assessed survey and focus group participants’ understanding of the types of financial services and financial professionals they used.962 Specifically, the authors of the OIAD/RAND study asked survey participants who were investors to identify which type of financial professional they worked with (investment adviser, broker-dealer, or dually-registered firm). The authors 958 See generally supra Section II.B.2 (discussing benefits of including disclosure on individualized firm services); Section II.B.6 (discussing removal of generalized comparisons between advisers and broker-dealers); see also Proposing Release, supra footnote 5 (discussing commenters in response to Chairman Clayton’s 2017 request for comment and commenters to the 913 Study). 959 Proposing Release, supra footnote 5, at Section IV.A.3.h. (stating that 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’ roles and legal obligations, 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); see also id., at n.5. 960 Similarly, the RAND 2008 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. RAND 2008, supra footnote 909. 961 Infogroup/ORC, U.S. Investors & The Fiduciary Standard, National Opinion Survey (Sept. 15, 2010), available at https://www.cfp.net/docs/ public-policy/us_investors_opinion_survey_201009-16.pdf (‘‘CFA Survey’’). The CFA Survey suggested that respondents were confused about differences between broker-dealers and investment advisers as described by the study’s authors to the respondents. 962 OIAD/RAND, supra footnote 3. PO 00000 Frm 00258 Fmt 4701 Sfmt 4700 compared the types of financial professionals reported by the survey participants with the actual status of those financial professionals as verified on the IAPD database, and found that the verified types of financial professionals in many cases did not match the types of financial professionals that were reported by the survey participants.963 For example, when financial professionals were verified to be dually registered, only 34% were reported by survey participants to be dually registered (and 56% were reported to be only investment advisers). In addition to the survey, the OIAD/RAND authors also asked a small focus group of participants that used financial professionals to identify which type of professional they were using, which was then verified by IAPD. Only one of the twelve participants was able to identify the correct type of financial professional unambiguously (although it was not clear if clients of verified duallyregistered firms were only utilizing one type of that professional’s services). The study authors concluded that this showed low awareness of the classification of investment advisers and broker-dealers. Further, the OIAD/RAND survey asked all survey recipients whether they could identify the type of financial professional that would typically exhibit certain business practices (such as executing transactions or being paid by commission), and concluded that at least a significant minority of participants could not do so for any of the typical practices. Between 13% and 21% of survey participants incorrectly answered ‘‘none of the above’’ for each of the business practices offered by the survey, although those practices were aligned with either investment advisers or broker-dealers in the marketplace. Moreover, only 36% of participants were able to identify that investment advisers were typically paid by a percentage of assets, whereas 43% of participants thought that practice was typical of broker-dealers. Twenty-six percent of participants incorrectly indicated that investment advisers execute transactions for clients.964 In 963 OIAD/RAND, supra footnote 3. Note that the authors caveated that it was unclear if survey participants who were customers of verified dually registered firms had misidentified the type of financial professional because they only received one type of service (brokerage or advisory) from the dually registered firm. 964 OIAD/RAND, supra footnote 3. The study authors also concluded that ‘‘an investor who works with an investment adviser because he or she is unaware that broker-dealers can execute transactions, and who seeks a professional solely to execute transactions on their behalf, might not E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 all, the study authors concluded that the survey participants’ knowledge of the marketplace for financial professionals appeared to be incomplete. The OIAD/RAND study authors draw further conclusions from their focus group study, where after being offered explanations of the differences between investment advisers and broker-dealers, some focus group participants continued not to be able to understand the distinctions between the two types of professionals. For the OIAD/RAND study authors, the focus group exercise underscored the difficulty of the topic for some investors. Investors are also confused about financial professionals’ standards of conduct and legal obligations. As discussed in the Proposing Release, the Siegel & Gale and RAND 2008 studies found that focus group participants generally did not understand legal terms, such as ‘‘fiduciary’’ or ‘‘best interest.’’ 965 In addition, the RAND 2008 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.966 Similarly, many survey respondents in the OIAD/RAND study had difficulty understanding the basic relational aspects of financial advice and the responsibility for taking risk in any form.967 Thirty percent of survey respondents believed that financial professionals would get paid only if an investor made money on an investment, and another quarter of respondents indicated that they did not know if financial professionals would get paid only if an investor made money on an investment.968 A majority of survey respondents expected that a financial professional acting in the client’s best interest would monitor the account, help the client choose the lowest cost products, disclose payments they receive, and avoid taking higher compensation for selling one product over another when a similar but less costly product is available.969 OIAD/ RAND focus group discussions about the distinctions between investment advisers and broker-dealers also suggested that some focus group participants were not able to distinguish investment advisers from brokerdealers. The study’s authors concluded necessarily be matched with the most appropriate professional.’’ 965 Proposing Release, supra footnote 5. 966 RAND 2008, supra footnote 909. 967 OIAD/RAND, supra footnote 3. 968 OIAD/RAND, supra footnote 3. 969 OIAD/RAND, supra footnote 3. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 that comments of those focus group participants also suggest that some individuals might value having a clear distinction between professionals who do act in the client’s best interest and professionals who do not act in the client’s best interest.970 Similarly, in RAND 2018 and in interview-based studies submitted by a group of commenters that test the proposed sample dual-registrant relationship summary, it was observed that investors could have difficulty understanding distinctions between the standard of conduct applicable to broker-dealers and investment advisers.971 With respect to investor perceptions of financial advisers’ fees and potential conflicts of interest, the OIAD/RAND study revealed that ‘‘some participants seemed unconcerned with conflicts or took it as a good sign if their professional had not disclosed a conflict to them . . . In all three groups that had experience using a financial professional . . . participants reported that their professional had not disclosed any conflicts.’’ 972 The OIAD/RAND study also found that almost a half of the investors who received investment advice in the study believed that their investment professional receives commissions. About a third believed the provider received payments from product companies (e.g., mutual funds); another 20% of participants believed the provider received a bonus. Altogether, more than half of the participants believed the provider received some sort of compensation whether through commission, bonus or product payment.973 The study concluded that ‘‘awareness of the nature of provider payments could help investors to recognize conflicts of interest . . .’’ and thus it could potentially improve investors’ decision making. Potential investor recognition of the importance of the conflicts of interest is reflected in that 51% of the OIAD/RAND study respondents said that it was important or extremely important that the financial professional receive all compensation from the customer, and only 15% reported that it was not important at all.974 With respect to investor trust, one commenter discussed the results of an online survey it had initiated that found that 96% of survey respondents mostly or completely trusted their financial 33575 professional.975 The vast majority of survey respondents (97%) also believed that their financial professional always or mostly has their investors’ best interest in mind.976 3. Investor Responses to Disclosures About Financial Professionals and Firms a. Retail Investors and Financial Disclosures Generally Commenters provided conclusions based on studies of potential limitations to the efficacy of financial disclosures, as discussed below.977 With respect to the particular areas of disclosure that retail investors find helpful, commenters provided us with information about the usefulness of such disclosures to retail investors from surveys or assessments. We generally note that the RAND 2018 survey and other surveys that were provided by commenters gathered participants’ subjective views and were not designed to objectively assess whether any sample disclosures improved participant comprehension.978 However, the RAND 2018 qualitative interviews included some general questions to participants about comprehension and helpfulness of the sample proposed relationship summary, which provided some insight into participants’ understanding of concepts introduced, as did another survey and two interview-based studies with respect to sample relationship summaries.979 Further, the RAND 2018 report and surveys and studies submitted by commenters reported that their participants subjectively thought that they were informed from the sample disclosures that they were provided. The RAND 2018 study authors found that nearly 90% of respondents stated that the sample proposed relationship summary that they reviewed would help them make informed decisions about investment accounts and services.980 Likewise, the RAND 2018 study authors also observed that interview participants demonstrated that they learned new information from the proposed relationship summary that they were provided. However, there was variation in understanding among participants and the interviews also revealed areas of 975 CCMC Letter (investor polling), supra footnote 21. 976 Id. supra footnote 3. 971 See supra Section II.B.3.b at footnotes 470–479 and accompanying text. 972 OIAD/RAND, supra footnote 3. 973 OIAD/RAND, supra footnote 3. 974 OIAD/RAND, supra footnote 3. PO 00000 970 OIAD/RAND, Frm 00259 Fmt 4701 Sfmt 4700 977 See infra Section IV.C for a discussion of this research. 978 See generally supra footnote 14. 979 See supra footnotes 14 and 20 and accompanying text. 980 See RAND 2018, supra footnote 13. E:\FR\FM\12JYR2.SGM 12JYR2 33576 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations confusion.981 Similarly, the Woelfel survey authors noted that after survey respondents were given time to read a sample proposed dual registrant relationship summary, the majority, regardless of their current investments or relationship with an investment adviser or broker-dealer, believed that they knew a ‘‘little more’’ about investment advisers and brokerdealers.982 Several commenters suggest that generally not all investors fully read or are able to digest information from disclosures about financial professionals. One commenter reports that almost half of its survey participants said they selectively skim the disclosures and eight percent said they rarely or do not ever read them.983 Along similar lines, commenters pointed to observations that investors may be overconfident in their ability to read and understand disclosures and that investors are unable to understand disclosures relating to compensation arrangements and conflicts of interest.984 Similarly, the RAND 2008 study highlighted that participants’ confusion about titles, services, legal obligations, and compensation persisted even after a fact sheet on broker-dealers and investment advisers was provided to participants.985 With respect to what type of disclosures from firms or financial professionals retail investors find helpful, commenters provided two surveys of retail investors’ general views of disclosures about financial professionals in response to the Proposing Release.986 One commenter reported results from an online survey that provides support for the idea that retail investors value at least some disclosures from financial professionals. From the a survey of 801 individuals, a majority of the survey participants (62%) said they would be interested in 981 Id. 982 See Cetera Letter II (Woelfel), supra footnote 17. 983 Schwab Letter I (Koski), supra footnote 21. e.g., AARP Letter. See also Better Markets Letter, CFA Letter I; Consumers Union Letter. 985 See RAND 2008, supra footnote 909. The fact sheet provided to RAND 2008 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 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. 986 See Schwab Letter I (Koski), supra footnote 21 and CCMC Letter (investor polling), supra footnote 21. jbell on DSK3GLQ082PROD with RULES2 984 See, VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 reading a hypothetical standardized document provided to all new clients that explained the relationship between a financial professional and clients and thought that such a document would ‘‘boost transparency and help build stronger relationships between me and my financial professional’’ (72%).987 Separately, with respect to what aspects of financial disclosures retail investors might find most helpful, Koski Research conducted an investor survey on behalf of another commenter and reported that the ‘‘majority of retail investors want communications that are relevant to them (91%), short and to the point (85%), and visually appealing (79%).’’ 988 The survey also reported that the top four things retail investors wanted communicated were the costs for advice, description of advice services, the obligations of the firm and its representatives, and the conflicts of interest.989 Additionally, approximately 70% of the participants in the 917 Financial Literacy Study indicated that they would read disclosures on conflicts of interest if made available.990 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 own 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. Among those participants in the 917 Financial Literacy Study who indicated that they would read disclosures on conflicts of interest if made available, 48% would request additional information from their adviser, 41% would increase the monitoring of their adviser, and 33% would propose to limit their exposure of specific conflicts. The majority of participants (70%) also wanted to see specific examples of conflicts and how those related to the investment advice provided. b. Investor Perceptions About Specific Disclosures Concerning Financial Professionals (2) Fees With respect to disclosures about fees, the Proposing Release also discussed the 917 Financial Literacy Study as well as the FINRA Investor Study 993 regarding the importance that investors place on disclosures about fees and compensation of financial professionals, and how those disclosures should be presented.994 Similar to the findings regarding conflicts of interest, the 917 Financial Literacy Study found that a majority participants indicated that disclosure of the fees and compensation of investment advisers was an essential element to any disclosure.995 (1) Conflicts of Interest As discussed in the Proposing Release, previous studies have found that investors consider conflicts of interest to be an important factor in disclosures from firms and financial professionals.991 For example, in the 917 Financial Literacy Study, 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.992 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 987 See CCMC Letter (investor polling), supra footnote 21. 988 See Schwab Letter I (Koski), supra footnote 21. 989 Id. For similar evidence, see also CCMC Letter (investor polling), supra footnote 21 (reporting that issues that ‘‘matter most’’ to investors include: ‘‘explaining fees and costs,’’ explaining conflicts of interest’’ and ‘‘explaining own compensation’’). 990 917 Financial Literacy Study, supra footnote 588. 991 See Proposing Release, supra footnote 5, at Section IV.A.3.c. 992 917 Financial Literacy Study, supra footnote 588. PO 00000 Frm 00260 Fmt 4701 Sfmt 4700 (3) Disciplinary History As discussed in the Proposing Release, survey evidence in the 917 Financial Literacy Study indicate 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.996 Despite this, most 993 FINRA Investor Education Foundation, Investors in the United States 2016 (Dec. 2016), available at https://www.usfinancialcapability.org/ downloads/NFCS_2015_Inv_Survey_Full_ Report.pdf (‘‘FINRA Investor Study’’). 994 See Proposing Release, supra footnote 5, at Section IV.A.3.c. 995 917 Financial Literacy Study, supra footnote 588. 996 See 917 Financial Literacy Study, supra footnote 588, 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 E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations investors do not actively seek disciplinary information for their advisers and broker-dealers. For example, a FINRA survey in 2009, 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.997 The FINRA Investor Study 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.998 jbell on DSK3GLQ082PROD with RULES2 C. Broad Economic Considerations We are adopting a requirement for broker-dealers and investment advisers and firms that are dually registered to deliver a relationship summary to retail investors because, as discussed in the baseline,999 many retail investors can be confused about their choices in the market for brokerage and investment advisory services. To that end, the relationship summary is meant to assist retail investors with both the process of deciding whether to engage or remain with a particular firm or financial professional and whether to establish or maintain an investment advisory or brokerage relationship. Specifically, low financial literacy, lack of knowledge about the market for financial advice, and lack of information about important aspects of the relationship between particular firms and their customers or clients,1000 may harm retail investors by deterring them from seeking brokerage or investment advisory services even if they could potentially benefit from it,1001 or by increasing the risk of a 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.’’). 997 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. 998 See FINRA Investor Survey, supra footnote 993. 999 See supra Section IV.B. 1000 Examples of such aspects of the relationship include the services and fees of particular firms, and conflicts of interest that may arise between particular firms and customers or clients. 1001 The potential loss to investors with low financial literacy from not seeking advice is illustrated by, e.g., the study by Hans-Martin von Gaudecker, How Does Household Portfolio Diversification Vary with Financial Literacy and Financial Advice?, 70 J. Fin. 489 (2015), which showed that investors with low financial literacy VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 mismatch between the investors’ preferences and expectations and the actual brokerage or advisory services they receive from a firm or professional.1002 To ameliorate this potential harm, the relationship summary is intended to reduce investor confusion and search costs in the process of (i) deciding whether to engage a particular firm or financial professional, (ii) whether to establish an investment advisory or brokerage relationship, and (iii) whether to terminate or switch the relationship or specific service provided. The relationship summary is expected to provide significant benefit to retail investors by focusing their attention on salient features of their potential relationship with a particular brokerdealer or investment adviser and highlighting the most important elements of this relationship in a single, succinct, and easy-to-understand document. The relationship summary also allows for comparability among broker-dealers and investment advisers by requiring disclosures on the same topics under standardized headings in a prescribed order to retail investors.1003 As we discuss above in Section I, we do not believe that existing disclosures provide this level of transparency and comparability across investment advisers, broker-dealers, and dual registrants. Below, we discuss in more detail the nature of the potential harm faced by retail investors from confusion about the market for brokerage and investment advisory services. We also discuss considerations involved in creating disclosures for retail investors that may reduce the potential for investor harm by increasing their knowledge about the market for brokerage and investment advisory services and facilitating their search for a firm or financial professional.1004 that do not seek financial advice on average incur significantly larger losses (by more than 50 basis points) from underdiversification compared to investors who seek financial advice (irrespective of financial literacy) and investors with higher financial literacy who do not seek advice. 1002 Studies provide results of investor misunderstanding that is consistent with some investors being at risk of entering into a mismatched relationship. For example, survey results in OIAD/RAND, supra footnote 3 suggest that a non-trivial subset of retail investors may misunderstand the type of their financial professional, the type of services the professional offers, and how the professional is compensated. 1003 See supra discussion in Section II.A.2. 1004 We are extending our discussion on broad economic considerations from the Proposing Release in response to concerns about the economic analysis in the Proposing Releases by commenters; see, e.g., Letter from Charles Cox, Former SEC Chief Economist, et al. (Feb. 6, 2019), available at https:// www.sec.gov/comments/s7-07-18/s70718-4895197- PO 00000 Frm 00261 Fmt 4701 Sfmt 4700 33577 Academic studies have documented a multitude of potential benefits that accrue to retail investors as a result of seeking investment advice, including, but not limited to: Higher household savings rates, setting long-term goals and calculating retirement needs, more efficient portfolio diversification and asset allocation, increased confidence and peace of mind, facilitation of small investor participation, improvement in financial situations, and improved tax efficiency.1005 Further, financial 177769.pdf. (‘‘Former SEC Senior Economists Letter’’). The Former SEC Senior Economists Letter raised three main concerns about the economic analysis in the proposed Regulation Best Interest and the Proposing Release: (1) The discussion of the potential problems in the customer-advisor relationship was incomplete and identified other features of the market for ongoing retail investment advice that might be problematic; (2) there was inadequate discussion and analysis of the existing economic literature on financial advice; and (3) there were questions of whether the disclosure requirements in the proposing release would provide meaningful information for customers. These concerns more directly focused on the economic analysis of the proposed Regulation Best Interest. However, concerns (1) and (3) appear to also apply to the economic analysis of the Proposing Release to some extent, and we address those concerns in this economic analysis. For instance, with respect to (1), this section provides a more in depth discussion compared to the Proposing Release of the harm that may arise when retail investors lack knowledge or are confused about the market for investment advisory and brokerage services, including a discussion of why additional disclosure may be useful to investors. With respect to (3), the discussion in this section expands on the discussion already provided in the Proposing Release on the potential limits to the effectiveness of disclosure to address the identified investor harm, but also discusses how disclosure should be designed to be effective, including how appropriately designed disclosures can help overcome some of the identified potential limitations of disclosure. The latter discussion provides a framework that informs our analysis in Section IV.D of the anticipated economic impacts of the relationship summary. In addition, the Former SEC Senior Economists Letter stated that ‘‘[w]e feel (preliminarily) that the new CRS forms would provide some helpful information. But we would far prefer for there to be evidence that the intended targets of these disclosures feel the same.’’ Our discussion takes into account the various investor surveys and studies that were conducted after the Proposing Release that reported that large majorities of investors believed the relationship summary would help them make more informed decisions about types of accounts and services. See, e.g., RAND 2018. 1005 See, e.g., Mitchell Marsden, Catherine Zick, & Robert Mayer, The Value of Seeking Financial Advice, 32 J. Fam. & Econ. Issues 625 (2011); Jinhee Kim, Jasook Kwon, & Elaine A. Anderson, Factors Related to Retirement Confidence: Retirement Preparation and Workplace Financial Education, 16 J. Fin. Counseling & Plan. (2005); Daniel Bergstresser, John Chalmers & Peter Tufano, Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry, 22 Rev. Fin. Stud. 4129 (2009); Ralph Bluethgen, Steffen Meyer, & Andreas Hackethal, High-Quality Financial Advice Wanted!, Euro. Bus. Sch., Working Paper, (Feb. 2008), available at https://citeseerx.ist.psu.edu/viewdoc/ download?doi=10.1.1.596.2310&rep=rep1 &type=pdf; Neal M. Stoughton, Youchang Wu, & E:\FR\FM\12JYR2.SGM Continued 12JYR2 jbell on DSK3GLQ082PROD with RULES2 33578 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations professionals may also explain to retail investors the informational asymmetries between product providers and their customers. Retail investors might not be able to disentangle such information asymmetries on their own. Studies also find that low financial literacy is negatively associated with the propensity to seek financial advice.1006 These findings collectively suggest that retail investors of low level financial literacy might be harmed because they might be less likely to seek financial advice in spite of the potential benefit from it. For a retail investor who decides to enter a relationship with a financial services provider, a low level of knowledge about the market for financial services might reduce the investor’s ability to accurately identify whether any given firm or financial professional offers a type of relationship that matches his or her preferences and expectations. This, in turn, increases the risk that the firm or financial professional is a poor match for the retail investor when compared to an alternative financial services provider. A relationship that represents a poor match between an investor and a firm or financial professional can leave an investor worse-off, relative to a better match, or no match at all, because the relationship could result in a cost of services that is higher than the investor expects or a level or type of service that is different than the investor expects, such as episodic recommendations versus continuing advice. A retail investor might search across a set of financial service providers to find a financial professional that best meets his or her needs.1007 For an investor who is able to acquire information from the financial service providers the investor chooses to evaluate, the more extensive a search the investor engages in, the more likely the investor will locate a good match. However, conducting such a search is costly and requires time, effort, and access to resources. Investors likely balance the benefits of evaluating each additional provider against the incremental cost of doing so, ending their search when the expected marginal cost of the search is greater than the expected marginal benefit from the search.1008 Moreover, some investors may experience higher-level of uncertainty about the benefits or costs of a search. For example, investors who are less knowledgeable about the general differences between different types of financial professionals, the services these professionals provide, and the factors they should consider in their choice, may not fully appreciate the benefits of searching for a provider that best meets their needs. To the extent such investors perceive a search as burdensome because they underestimate the benefits of searching, they might refrain from conducting a search or conduct a less extensive search to learn about potential alternatives, thereby increasing their risk of entering a relationship with a firm or financial professional that is a poor match with their expectations and preferences or not engaging in a relationship even if one might be beneficial.1009 General trust (in the sense of confidence) in financial markets can help alleviate certain behavioral biases and encourage participation in, for example, the stock market.1010 Trust at an interpersonal level may be less beneficial in certain circumstances. Research suggests that lower financial literacy among investors is positively associated with higher personal trust in their financial professionals.1011 Josef Zechner, Intermediated Investment Management, 66 J. Fin. 947 (2011). Francis M. Kinniry, et al., Putting a value on your value: Quantifying Vanguard Advisor’s Alpha, Vanguard Research (Sept. 2016) estimates the value to investors associated with obtaining financial advice of approximately 3% in net returns to investors, associated with suitable asset allocation, managing expense ratios, behavioral coaching, alleviating home bias, among others. 1006 For a discussion of the academic research on the role of financial literacy in seeking financial advice see, e.g., OIAD/RAND, supra footnote 3 at 8. 1007 The evidence discussed in supra Section IV.B.2.a on how investors select a financial professional or firm suggests that a large majority of retail investors rely on personal or professional referrals, which may indicate that they evaluate very few, if any alternative providers. One potential reason for this reliance on referrals could be that investors currently perceive their search costs to be high. Another possible reason, among others, could be that investors value the information derived from other people’s experiences more than other sources of information. 1008 This assumes a sequential search process, but an analogous argument can be made if an investor instead searches by deciding ex ante on a fixed number of alternatives to evaluate, in which case the marginal decisions then relates to what this number will be. See, e.g., Babur De los Santos, et al., Testing Models of Consumer Search Using Data on Web Browsing and Purchasing Behavior, 102 Am. Econ. Rev. 2955 (2012). We have expanded our discussion on search costs in response to main concern (1) of the Former SEC Senior Economists Letter; see supra footnote 1004. 1009 This argument assumes that less knowledgeable investors can learn at least some information from engaging in an initial search or a continued search that could be used to evaluate fit (albeit imperfectly so). If less knowledgeable investors cannot learn from a search at all, the choice of a firm or financial professional becomes similar to a random draw and a search, no matter how extensive, will not decrease the risk of a mismatch. 1010 See, e.g., the literature review in discussion in OIAD/RAND, supra footnote 3, at 11. 1011 See, e.g., Thomas Pauls, Oscar Stolper, & Adreas Walter, Broad-Scope Trust and Financial VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00262 Fmt 4701 Sfmt 4700 However, to the extent retail investors substitute trust for knowledge in their relationship with a financial professional, overreliance on trust may induce some investors to maintain a mismatched relationship longer than they otherwise would if they had higher financial literacy and a better understanding of the costs and benefits of the financial advice they receive from the professional, as well as awareness of alternative services or providers.1012 That is, particularly for lessknowledgeable investors, a high level of trust in a particular financial professional or firm may exacerbate the potential harm of a mismatched relationship. Similarly, some retail investors that select a firm or financial professional based on referrals from friends and family may do so solely on the basis of a high level of trust in these referring parties.1013 This can exacerbate the potential harm of a mismatched relationship in particular for less sophisticated investors and/or for investors who relied on referrals from less financially sophisticated parties.1014 Further, investors may endure a mismatched relationship for a longer period of time than they would absent switching costs, including the cost of a new search and any transaction costs involved in moving assets from one firm to another. These costs lower a retail investor’s incentive to look for a new firm or financial professional even if the Advice, Working Paper (Nov. 2016), available at https://www.researchgate.net/publication/ 314235638_Broad-scope_trust_and_financial_ advice. 1012 We acknowledge commenters’ concerns that higher financial literacy and more disclosures alone may not fully address the risk that retail investors would rely on trust in their financial services providers over other factors, such as knowledge about financial services industry participants, practices and products. See CFA Letter I (‘‘We’ve seen anecdotal evidence in our own personal encounters with investors of their tendency to trust their ‘‘financial adviser’’ without actually verifying how or how much they are paying or how their investments are performing. Even investors who would be considered sophisticated by any reasonable measure can exhibit a level of trust and confidence in their financial professional that isn’t based on data. Any disclosures about their financial professional’s services, duties, costs, and conflicts are unlikely to change those views’’); AARP Letter (‘‘Recent behavioral science studies have shown that disclosures are largely ineffective because they tend to increase conflict in advisers and make the investor more likely to trust the adviser and thus follow biased advice’’); see also Regulation Best Interest Release, supra footnote 47, (discussing how that rulemaking addresses the limitations of disclosure for customers of broker-dealers). 1013 We recognize that trust is not the only reason to rely on referrals; for example, there is informational value in other people’s personal experiences. 1014 See supra Section IV.B.2.a for survey evidence on the role of personal referrals in retail investors’ choice of financial professionals. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 current relationship turns out to be a poor match. Both overreliance on trust and the presence of switching costs increase the ex-ante value of avoiding a mismatched relationship in the first place. Retail investors could increase their knowledge about the market for brokerage and investment advisory services, and thereby engage in a more efficient search, by accessing information and disclosures currently provided directly by firms or available in a number of existing regulatory forms and platforms. Current sources of information include, among others, Form ADV (and IAPD) and BrokerCheck.1015 However, because existing disclosures are made on multiple and sometimes lengthy forms, and are obtained in different ways, it can be difficult for investors to grasp the most important features of the financial services from reading these materials.1016 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, which makes direct comparisons between broker-dealers and investment advisers more difficult. Voluntary disclosures and educational efforts made by financial services providers such as brokerdealers and investment advisers can potentially inform investors about the specific relationships they can have with providers and the types of services providers offer, but also about the overall market for financial advice and the different types of service providers and relationships available in the market. And such voluntary disclosure could, in principle, facilitate investor search. However, financial services providers may lack incentives to voluntarily disclose salient information or make the effort needed to educate investors about the various alternatives available to them because it is costly to do so. In addition to the costs of producing disclosures and training employees to deliver disclosures, 1015 See Proposing Release, supra footnote 5, at n.280. Investment advisers and broker-dealers may also provide additional information to retail investors through the firm’s website and the retail investor’s account agreement. Additionally, investment advisers and broker-dealers may provide information to retail investors through marketing materials (e.g., brochures) and other customer communications (e.g., fee schedules). 1016 There is some evidence suggesting investors are not reading current disclosures. For example, RAND 2018 reports that 13% of surveyed investors said that they had viewed Form ADV (11% said they viewed both an ADV and broker account opening document, 2% had only reviewed Form ADV). RAND 2018, supra footnote 13. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 providers may also perceive a risk that competitors would take advantage of disclosed information. Furthermore, disclosures that are not tailored to the provider and have more general educational value to retail investors have the features of a public good. If providers rely on their competitors to educate potential clients generally about the market for financial advice, there is an inefficiently low level of general educational material available to investors. Underprovision might occur even if such disclosures, were they to be provided, would increase the overall efficiency of the market for financial advice and thus benefit financial services providers as a group in the long run, for example, by sufficiently reducing confusion among the general investing public that more investors are willing to search for a financial services provider. Additionally, some broker-dealers and investment advisers may even privately gain from a lack of knowledge among retail investors to the extent they profit from attracting and retaining customers and clients who would be a better match with another provider.1017 For example, a customer of a broker-dealer who has a preference for active investing may actually be better off being a client of an investment adviser and paying a fixed percentage of assets per year as a fee for the advice instead of broker commissions each time she receives a recommendation that results in a transaction. However, this investor is likely a profitable customer for the broker-dealer. Similarly, a client of an investment adviser who prefers buyand-hold investments in a few index funds could potentially be better off in a relationship with a broker-dealer, by only paying a few one-time sales charges and commissions instead of a recurring percentage fee on the assets, which is likely more profitable to the investment adviser. In both of these cases, the firm has little incentive to provide the investor with information about available advice relationships that could persuade the investor to seek advice elsewhere or to switch to a different business line. In the presence of the frictions described above, requiring firms and financial professionals to furnish a short summary disclosure like Form CRS can benefit retail investors by reducing 1017 See, e.g., CFA Letter I (stating 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 that they are suffering significant financial harm as a result. Investor confusion is relevant only because it limits the tools the Commission has available to address that harm . . .’’). PO 00000 Frm 00263 Fmt 4701 Sfmt 4700 33579 information asymmetry between investors and firms and financial professionals and turning investor attention to more salient aspects of a firm and its services. In addition, as discussed above, no current required disclosure allows for comparability among broker-dealers and investment advisers by requiring disclosures on the same topics under standardized headings in a prescribed order to retail investors. A reduction in information asymmetry and improved comparability may reduce search costs for investors and increase their understanding about differences in offered relationships across firms and financial professionals, thereby reducing the risk of investors’ hiring a provider that is a poor match for their needs. However, for the relationship summary to be effective for retail investors it must be understandable. Studies have found that the format and structure of disclosure may improve (or decrease) investor understanding of the disclosures being made.1018 We discuss these studies below. Some commenters questioned the general efficacy of disclosure in the context of investment advice to retail investors.1019 We do not share this view. As we discussed above, we believe a short summary disclosure like Form CRS can provide benefits to retail investors. However, as we also discussed in the Proposing Release,1020 we recognize that there may be limits to the efficacy of disclosure in some 1018 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). 1019 See, e.g., AARP Letter (stating that ‘‘[r]ecent behavioral science studies have shown that disclosures are largely ineffective because they tend to increase conflict in advisers and make the investor more likely to trust the adviser and thus follow biased advice’’); Comment Letter of Economic Policy Institute (Aug. 7, 2018) (‘‘EPI Letter’’) (stating that ‘‘Disclosure requirements can be onerous, and disclosure may not only be ineffective, but counterproductive. For example, detailed disclosures can serve to bury important information, or disclosure of conflicts can be interpreted by consumers as evidence of honesty. Disclosure can make sellers more comfortable recommending products and services that are not in buyers’ best interests, and it can make clients less comfortable rejecting these recommendations at the risk of giving offense’’). 1020 See Proposing Release, supra footnote 5, at Section IV.B.1. E:\FR\FM\12JYR2.SGM 12JYR2 33580 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 circumstances. For example, the documented low level of financial sophistication of many retail investors can make it harder for them to process the implications of disclosure.1021 Another limitation of the efficacy of disclosure documented in research is that investors may have various behavioral biases, such as anchoring 1022 and over-confidence,1023 which could affect how the disclosed information is interpreted.1024 This could in turn lead investors to misinterpret, under-weight, or over-weight the implications of disclosures. Limited attention problems can also impede investors’ ability to effectively process the implications of some disclosures.1025 In addition, academic studies find that sometimes certain disclosures may result in unintended consequences. In particular, existing research has found that conflict of interest disclosures can increase the likelihood that the disclosing party would act on the conflict of interest.1026 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 (including to the customer’s detriment), or it can be caused by ‘‘strategic exaggeration,’’ aimed at 1021 See, e.g., L.E. Willis, Decision making and the limits of disclosure: The problem of predatory lending: Price, 65 Md. L. Rev. 707 (2006) (‘‘Willis Study’’). Commenters discussed similar issues, see, e.g., Comment Letter of Charles Ryan (Aug. 7, 2018); CFA Letter I; American Investment Council Letter. 1022 Anchoring bias implies undue reliance on a particular information signal at the expense of other signals. See, e.g., Robert A. Prentice, Moral Equilibrium: Stock Brokers and the Limits of Disclosure, 2011 Wis. L. Rev. 1059, at 1083 (2011) (explaining ‘‘people tend to anchor on the first information they receive, and then revise their judgments in the face of new information, but to an insufficient degree’’). 1023 Over-confidence bias implies over-estimation of probabilities of certain outcomes over objective probabilities. Id., at 1072, explains that ‘‘studies indicate that people tend, in mathematically impossible percentages, to believe that they are above average in driving, auditing, and teaching.’’ 1024 See, e.g., Jorgen Vitting Anderson, Detecting Anchoring in Financial Markets, 11 J. Behav. Fin. 129 (2010). 1025 See, e.g., David Hirshleifer & Siew Hong Teoh, Limited Attention, Information Disclosure, and Financial Reporting, 36 J. Acct. & Econ. 337 (2003) (‘‘Hirshleifer and Teoh Study’’). 1026 See, Daylian M. Cain, George Loewenstein, & Don A. Moore, The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest, 34 J. Legal Stud. 1 (2005) (‘‘Cain 2005 Article’’); Daylian M. Cain, George Loewenstein & Don A. Moore, When Sunlight Fails to Disinfect: Understanding the Perverse Effects of Disclosing Conflicts of Interests, 37 J. Consumer Res. 836 (2011); Bryan K. Church & Xi (Jason) Kuang, Conflicts of Disclosure and (Costly) Sanctions: Experimental Evidence, 38 J. Legal Stud. 505 (2009); Christopher Tarver Robertson, Biased Advice, 60 Emory L.J. 653 (2011). These papers study conflicts of interest in general, experimental settings, not specialized to the provision of financial advice. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 compensating the disclosing party for the anticipated loss of profit due to the disclosure. Experimental evidence also suggests that disclosure could turn some clients or customers into ‘‘reluctant altruists.’’ 1027 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.1028 The above literature indicates that conflicts of interest disclosures may interact with psychological biases to produce unintended effects that undermine the intended benefits of the disclosures. 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.1029 Academic research has identified a set of characteristics that may increase the effectiveness of a disclosure document to consumers. These characteristics, discussed below, frame our analysis of the economic impacts of the proposed rule.1030 Studies have found that the structure or format of disclosure may improve (or decrease) investor understanding of the disclosures being made.1031 Every disclosure document not only presents new information to retail investors but also provides a particular structure or format for this information that affects investors’ evaluation of the 1027 See Jason Dana, Daylian M. Cain, & Robyn M. Dawes, What You Don’t Know Won’t Hurt Me: Costly (but Quiet) Exit in Dictator Games, 100 Organizational Behav. & Hum. Decision Processes 193 (2006). 1028 Sunita Sah, George Loewenstein, & Daylian M. Cain, The Burden of Disclosure: Increased Compliance With Distrusted Advice, 104(2) J. Personality & Soc. Psychol. 289–304 (2013). 1029 See id. 1030 See George Loewenstein, Cass R. Sunstein, & Russell Golman, Disclosure: Psychology Changes Everything, 6 Ann. Rev. Econ. 391 (2014). The paper provides a comprehensive survey of the literature relevant to disclosure regulation. 1031 To that end, in order to facilitate more effective processing of disclosures by investors, some commenters emphasized the need to incorporate ‘‘design thinking’’ into the structure of the relationship summary. See, e.g., Fidelity Letter. See also supra footnotes 58–59. PO 00000 Frm 00264 Fmt 4701 Sfmt 4700 disclosure.1032 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 history relative to firms with no disciplinary history. If, instead, disciplinary history information were provided at the end of the relationship summary, the effect of the information could be moderated because it would no longer frame the other information provided to investors. Because of such framing effects, it is important that the structure of a disclosure document supports the intended purpose of the disclosure. Because individuals can exhibit limited ability to absorb and understand the implications of the disclosed information, for example due to limited attention or low level of sophistication,1033 more targeted and simpler disclosures may be more effective in communicating information to investors than more complex disclosures. Academic studies suggest that costs, such as increased investor confusion or reduced understanding of the key elements of the disclosure, are likely to increase as disclosure documents become longer, more convoluted, or more reliant on narrative text.1034 Consistent with such findings, other empirical evidence suggests that disclosure simplification may benefit consumers of disclosed information.1035 In general, academic research appears to support the notion that shorter and more focused disclosures could be more effective at increasing investors understanding than longer, more complex disclosures. 1032 See Amos Tversky & Daniel Kahneman, The Framing of Decisions and the Psychology of Choice, 211 Sci. 453 (1981). 1033 See, e.g., Hirshleifer and Teoh Study, supra footnote 1025; and Willis Study, supra footnote 1021. 1034 See, e.g., Samuel B. Bonsall & Brian P. Miller, The Impact of Narrative Disclosure Readability on Bond Ratings and the Cost of Debt, 22 Rev. Acct. Stud. 608 (2017) and Alistair Lawrence, Individual Investors and Financial Disclosure, 56 J. Acct. & Econ. 130 (2013); see also CCMC Comment Letter. 1035 See, e.g., Sumit Agarwal, et al., Regulating Consumer Financial Products: Evidence from Credit Cards, NBER Working Paper No. 19484 (Jun. 2014), available at https://www.nber.org/papers/w19484 (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). E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 Another characteristic of effective disclosures documented in academic research is disclosure salience.1036 Salience detection is a key feature of human cognition allowing individuals to focus their limited mental resources on a subset of the available information and causing them to over-weight this information in their decision making processes.1037 Within the context of disclosures, information disclosed to promote greater salience, such as information presented in bold text, or at the top a page, would be more effective in attracting attention than less saliently disclosed information, such as information presented in a footnote. Limited attention among individuals also increases the importance of focusing on salient disclosure signals. Some research finds that more visible disclosure signals are associated with stronger stakeholder response to these signals.1038 Moreover, research suggests that increasing signal salience is particularly helpful in reducing limited attention of consumers with lower education levels and financial literacy.1039 There is also empirical evidence that visualization improves individual perception of information.1040 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).1041 Overall these findings suggest that problems 1036 This is a view also supported by commenters. See, e.g., AARP Letter (‘‘A good disclosure statement will highlight the information most important to the consumer.’’). 1037 Daniel Kahneman, THINKING, FAST AND SLOW (2013). Susan Fiske & Shelley E. Taylor, SOCIAL COGNITION: FROM BRAINS TO CULTURE (3rd ed. 2017). 1038 See Hirshleifer and Teoh Study, supra footnote 1025. Commenters also addressed the benefit of visible disclosure signals. For example, the Fidelity Letter refers to Stanford Law School Design Principles stating ‘‘[u]se visual design and interactive experiences, to transform how you present legal info to lay people.’’ Also, Kleimann II states that ‘‘[f]or good design, we want to build upon this tendency by identifying the key questions investors should or are likely to ask and featuring them prominently in the text, thus easing the cognitive task for readers. . . .’’ Kleimann II, supra footnote 19. 1039 See, e.g., Victor Stango & Jonathan Zinman, Limited and Varying Consumer Attention: Evidence from Shocks to the Salience of Bank Overdraft Fees, 27 Rev. of Fin. Stud. 990 (2014). 1040 See John Hattie, VISIBLE LEARNING. A SYNTHESIS OF OVER 800 META–ANALYSES RELATING TO ACHIEVEMENT (2008). 1041 See Izak Benbasat & Albert Dexter, An Investigation of the Effectiveness of Color and Graphical Information Presentation Under Varying Time Constraints, 10–1 MIS Q. 59 (1986). However, one commenter noted that participants in the RAND 2018 qualitative interviews did not appear to process side-by-side tabular disclosures effectively. See Schwab Letter II. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 such as limited attention may be alleviated if key information in Form CRS is emphasized, is reported closer to the beginning of the document, and is visualized in some manner. This is also consistent with the recommendation of several commenters.1042 However, it is also important to note that given a choice, registrants may opt to emphasize elements of the disclosure that are most beneficial to themselves rather than investors, while deemphasizing elements of the disclosure that are least beneficial to them. As discussed further in the economic analysis below and discussions above, the final instructions of the relationship summary include requirements that are designed to mitigate this risk. For example, the final instructions require standardized headers in a prescribed order, certain other prescribed language (including for the required conversation starters), page limits, and certain text features, which mitigate providers’ incentives to behave opportunistically. There is also a trade-off between allowing more disclosure flexibility and ensuring disclosure comparability (e.g., through standardization).1043 Greater disclosure flexibility potentially allows the disclosure to reflect more relevant information, as disclosure providers can tailor the information to firms’ own specific circumstances.1044 Although disclosure flexibility allows for disclosure of more decision-relevant information, it also allows registrants to emphasize information that is most beneficial to themselves rather than investors, while deemphasizing information that is least beneficial to the registrants. Economic incentives to present one’s services in better light may drive investment advisers and broker-dealers to deemphasize information that may be relevant to retail investors.1045 Moreover, although standardization makes it harder to tailor disclosed information to a firm’s specific circumstances, it also comes with some benefits. For example, people are generally able to make more coherent and rational decisions when they have comparative information that allows them to assess relevant tradeoffs.1046 The final rules are intended to e.g., CFA Letter I; Morgan Stanley Letter. CFA Institute Letter I. 1044 See, e.g., Cambridge Letter; FSI Letter I; Mutual of America Letter; Northwestern Mutual Letter; SIFMA Letter; Vanguard Letter; Primerica Letter; TIAA Letter. 1045 Commenters had similar concerns, see, e.g., EPI Letter; Regulatory Impact Analysis, supra footnote 853; CFA Letter I. 1046 See, e.g., JR Kling, et al., Comparison Friction: Experimental Evidence from Medicare Drug Plans, 127 Q. J. Econ. 199 (2012) (finding that in a randomized field experiment, in which some PO 00000 1042 See, 1043 See Frm 00265 Fmt 4701 Sfmt 4700 33581 strike a balance between the relative benefits and costs of disclosure standardization versus disclosure flexibility; for example, by requiring standardized headings and a prescribed order of topics but allowing some flexibility in the firm’s own wording and the order of presentation within each topic. D. Economic Effects of the Relationship Summary 1. Retail Investors a. Overall Anticipated Economic Effects of Form CRS Overall, we expect that these final rules requiring firms to deliver a relationship summary will benefit retail investors in several ways, including by reducing information asymmetry between investors and firms (and their financial professionals), reducing search costs and facilitating easier comparisons between and among brokerage and investment advisory firms, and increasing understanding of, and confidence in, the market for financial services more generally. First, in the specific context of a retail investor considering a firm or financial professional, the relationship summary will reduce the information asymmetry between the investor and the firm or professional by increasing transparency to that investor about a firm’s services, fees, conflicts of interest, standard of conduct, and disciplinary history.1047 Some—though not all—of this information is currently available in the marketplace. The relationship summary, however, will require all firms to provide information on these topics in one summary disclosure, which will be available on firms’ websites, if they have one, at BrokerCheck and IAPD, and through Investor.gov. Current disclosure requirements do not provide this level of transparency and comparability for both broker-dealers and investment 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, et al., Preference Reversals Between Joint and Separate Evaluations of Options: A Review and Theoretical Analysis, 125 Psychol. Bull. 576 (1999). 1047 These aspects of the relationship summary are consistent with, for example, the disclosure items identified in the 917 Financial Literacy Study as essential for retail investors: adviser’s fees (76%), disciplinary history (67%), adviser’s conflicts of interest (53%), and adviser’s methodology in providing advice (51%); see 917 Financial Literacy Study, supra footnote 588. E:\FR\FM\12JYR2.SGM 12JYR2 33582 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations advisers. In addition, through the use of layered disclosure, the relationship summary will facilitate investors’ access to additional, more detailed, information. The relationship summary is also the first narrative disclosure for broker-dealers’ retail customers that will be filed with the Commission and widely available to the public. We believe providing this overview of information in one place will enhance the accessibility of this information for the retail investor reviewing it relative to the baseline. Moreover, some information, such as the payments to financial professionals, is not currently required to be publicly disclosed, making that information available for the first time. The relationship summary may also benefit investors by helping them separate ‘‘hard’’ information about services and fees from marketing communications. To the extent the relationship summary will be effective at informing retail investors,1048 it should improve their ability to assess whether a relationship offered by a particular firm is a good match with their preferences and expectations. Moreover, a reduction in information asymmetry may also help retail investors increase the value from any given relationship they enter with a firm or financial professional by potentially increasing their ability to monitor the relationship and to make more informed decisions related to the relationship during its duration, including whether to terminate the relationship. Second, Form CRS will provide benefits to those retail investors that want to compare more than one provider or service, including those that want to compare brokerage and advisory services, relative to the baseline. Form CRS is distinct from other required disclosures as it is a standardized disclosure to retail investors that is broadly uniform between investment advisers and broker-dealers, or that requires dual registrants to describe both brokerage and advisory services. In facilitating this comparability, the relationship summary may promote competition between financial service providers along dimensions such as fees, costs, and conflicts, in ways that improve retail investor welfare. The comparative benefits discussed above jbell on DSK3GLQ082PROD with RULES2 1048 As discussed supra, in Sections I and II, we commissioned the RAND 2018 report and received several surveys and studies provided by commenters. See supra footnotes 13–21 and accompanying text. Results of the RAND 2018 survey and other surveys or studies submitted to the comment file indicate that survey and study participants indicated their subjective view that a relationship summary would be useful for retail investors; see supra Section I and IV.B.3.b. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 could increase further should thirdparty data aggregators enter the market and use the information disclosed in relationship summaries to provide consolidated data on firms, as search and processing costs could be reduced even further for retail investors.1049 Third, we also believe that requiring all broker-dealers and investment advisers that serve retail investors to provide a relationship summary, along with the other initiatives we are adopting, will increase understanding of, and confidence in, the market for financial advice more generally. Specifically, because of confusion about the market for brokerage and advisory services or a general lack of confidence in the market, some retail investors are potentially discouraged from seeking a relationship with a financial provider and do not participate in the market for financial services.1050 The relationship summary may help spread awareness and understanding about the market for financial services by increasing transparency about the services, fees, conflicts and standard of conduct of financial professionals; reducing confusion among investors generally; and increasing the general level of confidence. This general increase in understanding and confidence should, in turn, make it more likely that investors participate in the market for financial services when participation is likely to benefit them. Some commenters suggested the general benefits to investors of the proposed relationship summary would be limited.1051 More specifically, several commenters were concerned that retail investors may be subject to information overload from reading the relationship summary, reducing the potential benefits to investors because of the cognitive costs of digesting the information.1052 We acknowledge that there are limits to investor cognition with respect to lengthy and detailed disclosures,1053 however the relationship summary is shorter and more concise than disclosures currently available to investors, which should reduce the likelihood of information overload. Moreover, we have modified the relationship summary from the 1049 The requirement that the headings should be machine-readable may facilitate such entry by third-party data aggregators. 1050 See, e.g., OIAD/RAND, supra footnote 3, for a review of the academic evidence on such effects. 1051 See, e.g., CFA Letter I and EPI Letter. 1052 Such concerns are raised in, e.g., AARP Letter; ACLI Letter; Rhoades Letter. Relatedly, some commenters argued that the relationship summary is duplicative of other disclosures and is unnecessary. See, e.g., supra footnote 33. 1053 See supra footnote 1034 and accompanying text. PO 00000 Frm 00266 Fmt 4701 Sfmt 4700 proposal to further streamline and shorten it, and minimize the use of legal or technical jargon, thereby further reducing the potential that the relationship summary poses a cognitive burden for retail investors that undermines the overall benefit of the disclosure. We also recognize that the relationship summary, as with other required disclosures, has costs.1054 For example, as discussed above, there is a risk that disclosure of conflicts of interest can actually increase costs to investors by, for example, providing a perceived ‘‘moral license’’ to financial professionals to act on disclosed conflicts and encourage them to provide more conflicted advice at the expense of investors.1055 In addition, some commenters expressed a belief that the disclosures in the proposed relationship summary, particularly due to the prescribed wording, may increase investor confusion 1056 or may ‘‘create misimpressions, and may even constitute outright misstatements, inaccuracies, or misrepresentations’’ in certain contexts.1057 In consideration of these comments, the final requirements for Form CRS permit firms, within the parameters of the instructions, largely to describe their services, investment offerings, fees, and conflicts of interest using their own wording. The final requirements also incorporate many other changes in response to commenters’ concerns and suggestions and insights from investor surveys and roundtables, which are intended to increase the benefits and reduce the costs to investors relative to the proposed disclosure. Additionally, as with required disclosures generally, we recognize that the relationship summary alone likely would not fully alleviate investor confusion or risk of mismatched relationships in the marketplace. Moreover, firms may attempt to pass through some of the direct compliance costs we discuss further below to retail investors, for example, by charging higher commissions, asset-based management fees, or other fees. However, we believe such pass through of costs is likely to be limited because we expect these direct expenses to be 1054 See the discussion on the limits and potential costs of disclosures to retail investors in supra Section IV.C. 1055 Some commenters raised similar concerns. See, e.g., CFA Letter I. 1056 See, e.g., Financial Planning Coalition Letter (expressing concern that Form CRS may exacerbate investor confusion). See supra footnotes 77 and 80 and accompanying text. 1057 Committee of Annuity Insurers Letter. See supra footnotes 76–81 and accompanying text. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations relatively small in the context of the overall size of the brokerage and investment advisory industries.1058 Additionally, to the extent the relationship summary may promote competition between financial service providers, as discussed above, any increase in competition both among and between broker-dealers and investment advisers could reduce the pricing power of firms, and thereby reduce the ability to pass through the compliance costs associated with the relationship summary. The magnitude of the anticipated economic effects discussed above will depend on a number of factors, including the extent to which the relationship summary will increase investors’ understanding about their potential or current relationships with firms and financial professionals, and in what ways such an increase in understanding would affect their behavior. Given the number and complexity of assumptions that would be required to be able to estimate how the relationship summary will affect investors’ understanding and their decision-making, and the lack of data on relevant characteristics of individual firms and their prospective and existing retail investors, the Commission is not able to meaningfully quantify the magnitude of these anticipated economic effects. We discuss the benefits and costs to retail investors of certain elements of the relationship summary requirements below, including requirements regarding length and presentation, standardization, content (including layered content), delivery, and filing. As part of these discussions, we also discuss certain changes from the proposal and how we anticipate those changes affect the benefits and costs of the final relationship summary relative to the proposed requirements. jbell on DSK3GLQ082PROD with RULES2 b. Presentation and Format The presentation and format of the relationship summary are designed to facilitate retail investors’ processing of the provided information to help them compare information about firms’ relationships and services, fees and costs, specified conflicts of interest and standards of conduct, and disciplinary history, among other things. The relationship summary is also designed to promote effective communication between firms and their retail investors. Several features of the relationship 1058 See infra Section IV. D.2.b.(4) for a summary of estimates of certain compliance costs developed for the purpose of the Paperwork Reduction Act analysis. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 summary should reduce some of the limitations discussed above that may undermine the efficacy of disclosures, such as cognitive limitations and disclosure overload, as discussed further below. The magnitude of the anticipated benefits and costs to retail investors discussed below will depend on a number of factors, including the extent to which the presentation and formatting requirements for the relationship summaries will help increase investors’ understanding about the content of the relationship summaries, and in what ways such an increase in understanding would affect their behavior. (1) Length and Amount of Information Unlike many other required disclosures by financial firms, the relationship summary has a page limit. We believe that limiting the disclosure length and prescribing certain elements of the relationship summary’s content could benefit investors relative to the baseline by forcing firms to provide concise and clear investor-relevant information, thereby reducing information overload and increasing the likelihood that investors will focus their attention on the relationship summary. The optimal length of the relationship summary for investors may vary from investor to investor based on individual limits to attention and ability to process a lengthier document, though investor and commenter feedback indicated many investors preferred a relationship summary no longer than, and in some cases shorter than, what was proposed.1059 We have also reduced the page limit for standalone broker-dealers’ and standalone investment advisers’ relationship summaries from four to two, thereby potentially increasing the benefits of a shorter document relative to the proposal. However, we recognize that there are potential costs to requiring a page limit.1060 For example, as pointed out by commenters, a prescribed page limit may make it more difficult for some firms to effectively describe the nature or range of the relationships and may prompt them to exclude details that 1059 For example, 57% of RAND 2018 survey respondents indicated that the relationship summary was too long, 41% said it was about right, and roughly 2% said it was too short. RAND 2018, supra footnote 13. See also supra footnotes 129– 139. 1060 Just as reducing the maximum page length from four to two for standalone broker-dealers and investment advisers could increase the benefits relative to the proposal; this change could also increase these costs relative to the proposal. PO 00000 Frm 00267 Fmt 4701 Sfmt 4700 33583 investors might find important.1061 To the extent the provided disclosure becomes too abbreviated it may confuse investors rather than inform them about the relationship, which could increase search costs and increase the risk of a mismatched relationship relative to the baseline. The relationship summary includes several elements to mitigate the potential costs of providing less comprehensive information by utilizing layered disclosure, which includes encouraging, and in some cases requiring, hyperlinks to additional information and other textual features, such as hovers, to provide descriptions or definitions of terms.1062 The relationship summary also includes conversation starters that are designed to elicit more substantial conversations on certain topics. Such conversations could further mitigate the costs of less comprehensive information by encouraging the providers to elaborate on topics that investor may find confusing. Finally, we believe that allowing only the required and permitted information will promote standardization of the information presented to retail investors, minimize information overload, and allow retail investors to focus on information that we believe is particularly helpful in deciding among firms. However, we acknowledge that the potential cost of this level of standardization is that firms will not be able to include other information that might also be helpful to investors. (2) Organization of Information and Text Features As discussed above, academic research has documented how individual perceptions of information can change depending on the framing of the information.1063 The relationship summary’s requirement to use standardized questions as headings should help retail investors frame the information that follows the question by establishing sufficient context and increasing salience of the information presented.1064 The final instructions include an instruction encouraging the use of 1061 See supra Section II.A.2 for examples of commenters raising this concern. 1062 See generally supra Section II.A.4 for examples of graphical features encouraged by the Relationship Summary instructions. 1063 See supra footnote 1032 and accompanying text. 1064 The proposal had required headings to frame the information, but did not require they be in the form of questions. See supra Section II.A.2 for a discussion of comments related to the question-andanswer format, including its potential utility to investors’ understanding, and our decision to require this format. E:\FR\FM\12JYR2.SGM 12JYR2 33584 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 electronic and graphical features in the relationship summary.1065 Additionally, the relationship summary requires the use of text features for certain information, such as the conversation starters, which should increase the salience of this particular information and increase the likelihood that investors will review it. Based on academic research on disclosure readability,1066 we believe the use of text features, whether voluntary or required, will facilitate retail investors’ absorption of the provided information. Additionally, certain electronic features, such as embedded hyperlinks and hovers, should facilitate retail investors’ access to additional information if they are interested, thereby reducing their costs in locating the information. We recognize that because we are encouraging, but not requiring, firms to use graphical and electronic features, some firms might not use text features beyond what is required, potentially reducing their use and the attendant benefits. We believe, however, that providing some flexibility in design to firms may provide a benefit to retail investors, because firms competing for retail investors likely have incentives to use graphical and electronic features to enhance the retail investor’s experience. Moreover, flexibility also allows firms to continuously improve their use of graphical and electronic features as they learn over time what features are the most effective. We recognize, however, that one potential cost of allowing this flexibility is that firms may also have incentives to use certain text features to increase the salience of the portions of the disclosed information that they prefer to highlight, rather than the information that may be the most useful to investors to highlight. The final instructions do not include certain presentation requirements that we had proposed. For example, we proposed requiring that dual registrants present their information in a single relationship summary, using a twocolumn format. The final instructions permit dual registrants (or affiliated broker-dealers and investment advisers) to prepare either a single relationship summary describing both brokerage and investment advisory services, or two separate relationship summaries 1065 For a non-exclusive list of features the instructions encourage firms to use, see supra Section II.A.3. Some features are exclusive to electronic versions of the disclosure, such as hovers, while others could be used as part of a paper disclosure, such as comparison boxes. The benefits and attendant costs of any electronic features will generally be limited to those retail investors that access the document electronically. 1066 See, e.g., supra footnote 1034 and accompanying text. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 describing each service.1067 Additionally, we are requiring such firms to use standardized headings in a prescribed order, and to design their relationship summary in a manner that facilitates comparison, but the final instructions do not specifically require a two-column format. We believe this modification could increase the benefits relative to the proposal to investors of the relationship summary by permitting firms to choose design elements that might facilitate comparison more effectively than a two column format. We recognize, however, that absent a specific design requirement, some firms might present this information in a manner that is less effective at facilitating investors’ understanding than the proposed two-column format. We believe, however, that the potential benefits of allowing firms with differing business models to determine the design methods most effective at facilitating comparability justifies the change from a single, prescribed design element. Additionally, the final rule does not adopt the proposed restrictions on paper size, font size, or margin width, and instead requires them to be ‘‘reasonable.’’ We believe that these modifications from the proposal will incentivize firms to design relationship summaries that most effectively and accurately communicate their disclosed information to the benefit of investors, as well as encourage firms to make interactive, electronic disclosures available. c. Standardization (1) Standard Question-and-Answer Format and Standard Order of Information The final rules require that firms present information under standardized headings and respond to all the items in the final instructions in a prescribed order.1068 We expect that requiring the same set of headings in a prescribed order for each relationship summary will facilitate retail investors’ ability to compare relationship summaries across firms. In addition, the prescribed wording of the headings reduces the risk that firms would use the headings to ‘‘frame’’ each topic in ways that would 1067 See generally Section II.A.5 for a discussion of specific instructions, as well as comments received. 1068 See generally infra Section II.A.2 for discussion of the specific instructions, as well as comments received. In terms of specifically adopting a question-and-answer format for the standardized headings, we believe that adopting this format is likely to increase the salience of the information under each heading and improve investors’ cognitive engagement with the document, which should facilitate their understanding of the disclosed information. PO 00000 Frm 00268 Fmt 4701 Sfmt 4700 be less useful for retail investors’ understanding of the disclosed information. As discussed above, academic research has documented how individuals’ perceptions of information can change depending on the framing of the context of the information.1069 We expect retail investors to benefit from this standardization to the extent they review relationship summaries from more than one firm, as the standardized headings in the prescribed order will allow them to compare firms’ responses.1070 Additionally, the requirement that firms structure the headings in machine-readable format could reduce the cost of third party data aggregators to analyze relationship summaries across many firms and display comparisons of responses, ultimately reducing search costs for investors.1071 Because firms will be given very limited flexibility in terms of language for headings and the order of the sections,1072 some firms may find it more difficult to effectively present the information specific to their business and circumstances they believe should be made salient to retail investors. To the extent that the headings and the specified order do not specifically promote such information for a particular firm, and this information is relevant to investment decisions, investors may potentially find the relationship summary less useful in evaluating the specific firm. To mitigate this potential cost and provide some flexibility to firms, the final rules allow firms to discuss the required sub-topics within each item in an order that firms believe best promotes accurate and readable descriptions of their business.1073 The final rules also allow firms to omit or modify a disclosure or conversation starter that is inapplicable to their business or specific required wording that is inaccurate. The benefit of such flexibility is that it allows firms to increase saliency of and direct investor attention to the more relevant 1069 See supra footnote 1032 and accompanying text. 1070 See Morningstar Letter (commenting on the importance of standardized disclosure, that ‘‘[f]urther, it is extremely important for conflictmitigation disclosures to be standardized. . . The Commission could require a table, as we discuss below, for the Client Relationship Summary that standardizes how all broker/dealers list their relevant fees, making the costs of opening and maintaining an account transparent and comparable’’). 1071 Two commenters argued for machinereadability to allow for third party development of comparison tools. See supra footnotes 663 and 664. 1072 See supra footnote 91. 1073 The proposed instructions prescribed the order of information within each item. See supra footnote 121. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations disclosures. We believe the mix of requiring standardized headings and a prescribed order of topics but allowing some flexibility in the order of presentation within each topic strikes an appropriate balance in the inevitable trade-off, discussed further below, between the relative benefits and costs of disclosure standardization versus disclosure flexibility. The magnitude of the anticipated benefits and costs to retail investors discussed above will depend on a number of factors, including the extent to which the standardized headings and prescribed order of information will help increase investors’ understanding about the content of the relationship summaries, and in what ways such an increase in understanding would affect their behavior. jbell on DSK3GLQ082PROD with RULES2 (2) Prescribed Wording The final instructions include a mixture of limited prescribed wording that firms must include and requirements for firms to draft their own descriptions that comply with instructions about topics they must address.1074 As with any disclosure document, there are inevitable trade-offs between prescribing specific wording for firms to use (when applicable) and providing discretion to firms to use their own wording. We describe those tradeoffs, as they relate to the final instructions, below. The proposed instructions would have required prescribed wording in several items of the relationship summary, including fees and costs and a comparison section for standalone broker-dealers and investment advisers. We explained in the Proposing Release that prescribed wording for these items could benefit investors through standardization and by improving comparability across relationship summaries, while at the same time could impose costs on investors if prescribed wording does not accurately represent a firm’s services.1075 We are adopting final instructions that largely eliminate prescribed wording for most of these items and instead permit firms, within the parameters of the instructions, to respond to the relationship summary items using their own wording.1076 We continue to prescribe wording for headings, conversation starters, and the standard of conduct, as well as a factual 1074 See generally supra Section II.A.1 for a discussion of these instructions, comments received on the proposal, and changes made regarding the amount of prescribed wording. 1075 See Proposing Release, supra footnote 5, at Section IV.B.2.a. 1076 See generally Section II.A.1. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 33585 disclosure concerning the impact of fees and costs on investments over time.1077 However, firms may omit or modify required disclosures or conversation starters that are inapplicable to their business or specific wording required by the final instructions that is inaccurate.1078 Based on feedback from commenters and observations reported by investor studies and surveys, this change will increase the benefits of the relationship summary to investors relative to the proposal. Specifically, several commenters suggested that some of the prescribed wording would not only reduce the accuracy of the information provided by firms but could also confuse investors about a firm’s offerings, and we have made changes in light of those comments. We believe the final rules strike an appropriate balance between comparability between firms and the accuracy and relevance of information contained in relationship summaries, increasing potential benefits to investors relative to the proposal. We nevertheless recognize reductions in benefits relative to the proposal stemming from this approach. It decreases the degree of standardization of the information which could impact comparability across relationship summaries, as suggested by some academic research.1079 However, to the extent some of the prescribed language in the proposed rules would be considered ‘‘boilerplate’’ by investors or would not be applicable to a particular firm’s services or business, the reduction of such prescribed wording in the final rules is not likely to come at a cost to investors (and in fact is likely to benefit investors). The risk of lower standardization and comparability also is mitigated because, while not prescribing specific wording, the final instructions require prescribed topics that all firms must include in each item. For example, in their description of services, all firms must address monitoring, investment authority, limited investment offerings, and account minimums.1080 Moreover, increased flexibility for firms to describe their services and offerings relative to the proposal could impose costs on retail investors if it increases the potential ability of some firms to provide information in a less useful or clear way in their own words than when required to use prescribed wording.1081 One section proposed for standalone broker-dealers and investment advisers, which we referred to as the Comparisons section, had entirely prescribed wording.1082 We are not adopting this proposed section. Additionally, we removed prescribed wording from the proposed introduction, which would have noted that brokerage and advisory services were distinct.1083 On one hand, omission of the Comparisons section potentially could reduce the risk of information overload for investors. On the other hand, omitting this section might reduce benefits relative to the proposal by reducing the salience of potentially valuable comparative information available to retail investors at the point of forming a relationship, particularly if a retail investor does not review relationship summaries of multiple firms. We have taken specific measures to maintain some of the benefits we had intended to achieve in the proposed Comparisons section by using other methods to enable retail investors to continue to view comparative information and access more general educational information. For example, all firms must provide at the beginning of the document a link to Investor.gov/CRS, which offers educational information about investment advisers, broker-dealers, financial professionals and other information about investing in securities. In addition, dual registrants and affiliated firms that offer their brokerage and investment advisory services together are required to provide information about both types of services with equal prominence and in a manner that clearly distinguishes and facilitates comparison. This instruction applies regardless if they prepare a single relationship summary or two separate relationship summaries describing each type of service. If dual registrants prepare two separate relationship summaries, they must cross-reference or link to the other and deliver both with equal prominence and at the same time. Affiliates offering brokerage and investment advisory services together have similar presentation and delivery requirements. The magnitude of the anticipated benefits and costs to retail investors discussed above will depend on a number of factors, including the extent 1077 See generally Section II.A.1. We discuss the benefit and costs of these items, including related to the prescribed wording, below, in Section IV.A.c. 1078 See supra footnote 91. 1079 See generally supra Section IV.C. 1080 See generally supra Section II.A.3. 1081 We also acknowledge there is a risk that some firms could use the flexibility to strategically omit or obscure information. Such action, however, would risk liability under Form CRS or the antifraud provisions of the Advisers Act. See, e.g., General Instruction 2.B. to Form CRS. 1082 See generally supra Section VI for a discussion of the proposed requirements as well as comments received. 1083 See supra Section I. PO 00000 Frm 00269 Fmt 4701 Sfmt 4700 E:\FR\FM\12JYR2.SGM 12JYR2 33586 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations to which the specific requirements regarding wording will help increase investors understanding about the content of the relationship summaries, and in what ways such an increase in understanding would affect their behavior. d. Content The final instructions require firms to include specific items in the relationship summary. Below we discuss the anticipated benefits and costs to retail investors from these items.1084 The magnitude of these anticipated benefits and costs to retail investors will depend on a number of factors, including the extent to which the specific items of disclosure will help increase investors understanding about their potential or current relationships with firms and financial professionals, and in what ways such an increase in understanding would affect their behavior. jbell on DSK3GLQ082PROD with RULES2 (1) Relationship and Services The relationship summary requires an overview of the services that the firm provides to retail investors.1085 The topics that the firm must discuss include principal brokerage and advisory services, monitoring, investment authority, limited investment offerings, as proposed, and, new to the adopting release, account minimums and other requirements. The services firms provide to retail investors vary widely. These differences exist not only between broker-dealers and investment advisers, but also within different types of broker-dealers and investment advisers. We believe that this section will increase the transparency, saliency, and comparability of information about the types of services, accounts, and investments provided by firms, which should likewise improve matching between firms and retail investors. We have made some changes from the proposal intended to increase the potential matching benefit. In particular, instead of using prescribed wording, firms will describe their services using their own wording. Firms must also describe account minimums, which could improve matching with the provider and may reduce investor search costs, especially for investors that fall short of required minimums so that retail investors can be aware of potential limitations on their initial or 1084 See supra Section II.B. supra Section II for a discussion of the requirements and comments received on the proposal. 1085 See VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 continued eligibility for services.1086 Because all firms must describe particular topics, we believe investors can also use this information to compare firm services if they review multiple relationship summaries. We believe the approach of firms using their own wording to describe their services will increase the benefit to investors relative to the proposal by allowing firms to provide descriptions that are a better match for their particular services. This approach also avoids the cost of firms being required to make inaccurate or confusing disclosures given their specific business models, as raised by commenters.1087 This potential increase in benefit, however, comes with attendant potential increases in costs to the extent that firms do not present the most relevant aspects of their services or their descriptions are unclear, as discussed in the considerations regarding prescribed wording above. On balance, we believe that allowing for a description that is accurate and better matched to a firm’s services likely would be more beneficial and less confusing to investors. (2) Fees and Costs, Standard of Conduct, and Conflicts of Interest The relationship summary requires several prescribed questions and required responses about fees, conflicts of interest, and the standard of conduct.1088 Some of this information will be required to be provided to investors for the first time, such as an articulation of the standard of conduct. Other information, while currently available in various sources, will be presented centrally in the relationship summary, with links to more detailed, layered information about fees and conflicts. Additionally, providing retail investors with context for the more detailed information could potentially pique their interest and lead retail investors to seek more information about fees and conflicts through the required links. We believe both the information not previously required and the consolidated summary of information already available elsewhere will benefit investors by increasing salience, transparency, and comparability, and reducing information asymmetry compared to the 1086 Disclosures of account minimums could also help make retail investors more focused on their future planning needs, for example, by incentivizing them to target minimal future investment levels to reach an asset value level that will make lower fees or additional services available from a particular provider. 1087 See, e.g., supra footnote 269. 1088 See supra Section III for a discussion of the requirements and comments received on the proposal. PO 00000 Frm 00270 Fmt 4701 Sfmt 4700 baseline. More specifically, including these disclosures prominently, in one place, in a digestible manner, at or before the start of a retail investor’s relationship with a firm or financial professional could facilitate meaningful disclosure in the relationship summary, as well as conversations between the retail investor and his or her financial professional, and help the retail investor decide on the types of services that are right for him or her. In addition, to the extent that the specified conflicts of interest disclosures could draw retail investors’ attention to conflicts, they may improve retail investors’ ability to select and monitor firms and financial professionals. The fees, costs, and conflicts disclosure also potentially has costs for investors. In particular, and as discussed above,1089 the perception that an investor has been warned (via the disclosure) of a firm’s and financial professional’s potential bias may lead some financial professionals to believe that they are less obligated to provide unbiased advice. Further, the standard of conduct and conflict disclosures could make firms and financial professionals appear more trustworthy and as a result reduce the incentives for retail investors to examine additional information more carefully. Conversely, a potential cost for investors of such disclosures is that some investors may mistakenly leave the market for financial services or choose to not engage with a financial professional because they infer from the discussion of conflicts of interest and fees that a financial professional could provide bad advice or recommend products that will reduce their financial well-being. However, the placement of the prescribed standard of conduct disclosure immediately preceding the conflicts disclosure may alleviate the risk that investors will overreact to the conflicts of interest disclosure in this manner, because the standard of conducts disclosure clarifies that the firm or financial professional must act in the investor’s best interest. We received significant comments about the potential efficacy of the proposed disclosures related to fees and costs, conflicts, and the standard of conduct, and the ultimate benefit of such disclosures to investors. Likewise, feedback from investors through surveys and studies and in Feedback Forms revealed confusion about the proposed standard of conduct section in 1089 See supra footnote 1026 and accompanying text. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 particular.1090 Results reported in investor surveys and studies also showed that the proposed conflicts section was rated one of the least useful sections, which may suggest that some investors did not understand the role of conflicts based on the disclosure as presented by the sample proposed dual registrant relationship summary.1091 We have made several changes from the proposed relationship summary designed to increase the clarity and salience of the disclosures, thereby increasing the potential benefit and reducing the potential costs discussed above relative both to the baseline and the proposal. We also believe the changes will reduce the risk that investors will not read the section or will misinterpret it, increasing the effectiveness of these disclosures and therefore the potential benefit. First, by integrating the section covering fees, costs, conflicts of interests, standard of conduct, and how representatives are paid,1092 we believe retail investors may be more primed to process implications of these disclosures in a more integrated fashion due to their proximity. In particular, providing these disclosures in the same section could increase the salience of this information for investors,1093 both relative to the proposal and the baseline, and may potentially improve investor cognitive processing of how conflicts of interest can have an impact on the services and advice provided and costs paid by investors. Second, with respect to fees, the relationship summary requires firms to discuss under separate question headers (i) the principal fee and the incentive that it creates and (ii) other fees and costs that the investor will pay. We are requiring firms to summarize, in their own words, the principal fees and costs that retail investors will incur, including how frequently they are assessed and the conflicts of interest that they create. We think investors will be better able to process the implications of the principal fee disclosure through this requirement. Additionally, requiring firms to describe other fees and costs investors will pay, distinct from the principal fee, will clarify for investors that they pay not only a principal fee for advice, but also 1090 See supra footnotes 475–478 and accompanying text. 1091 See supra footnotes 522–524 and accompanying text. 1092 See supra discussion in Section II.A.4. 1093 This is also consistent with some commenters’ suggestions and the organization of several sample relationship summaries submitted by commenters. See supra footnote 373 and accompanying text. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 additional fees and costs. This may potentially prompt investors to use the required link to learn more information, ask follow-up questions, or monitor for such fees and costs. Third, the instructions require that the standard of conduct disclosure be placed under the same header as the summary of firm-level conflicts. The expected benefit of placing these conflicts of interest and standard of conduct disclosures together is to improve investor processing of the implications of conflicts of interest disclosure and legal obligations underlying the particular standard of conduct (i.e., best interest for brokerdealers and fiduciary duty for investment advisers) as well as to prevent investor misinterpretation of these disclosures. We continue to prescribe wording for the standard of conduct, which we believe will have greater benefits than giving firms flexibility to describe the standard of conduct. Unlike other areas where we are allowing firms to use their own words, the standard of conduct, whether a fiduciary duty for an investment adviser or Regulation Best Interest for a broker-dealer, applies during the course of the adviser’s relationship or where a broker-dealer makes recommendations. We also changed from the proposal the specific wording in an effort to simplify the disclosure relating to the standard of conduct and thereby increase understanding by investors. We believe reducing the length and the complexity of the prescribed wording for the standard of conduct will increase the salience and comprehension of the required standard of conduct disclosure, because a more readable and shorter disclosure is less likely to be ignored by investors due to information overload and limited attention. While retail investors may benefit from understanding the standard of conduct that firms and financial professionals are subject to when providing investment advice or recommendations, discussing the standard of conduct in connection with conflicts of interest may benefit investors by making it clear that the standard of conduct does not mean that advice is conflict-free. Regarding the conflicts disclosure itself, we have added a new requirement that if none of the enumerated conflicts required to be disclosed by the instructions is applicable to a firm, the firm must select at least one of its material conflicts to describe. This was designed to eliminate the potential that firms would not have to disclose any conflicts, which would have been costly to investors if it caused them to believe PO 00000 Frm 00271 Fmt 4701 Sfmt 4700 33587 that the firm had no conflicts. The relationship summary does not require disclosure of all conflicts but does require firms to include a link to additional information about their conflicts. We believe this will benefit investors relative to the baseline by providing sufficient information about certain conflicts to increase their understanding of incentives generally and potentially inducing them to review the linked information, which also minimizes the potential for information overload. Finally, in addition to requiring firmlevel conflicts, the relationship summary includes a separate question and required response about how financial professionals are compensated and the conflicts of interest those payments create. This disclosure will distinguish firm-level from financial professional-level conflicts, which we believe will benefit retail investors by helping them better understand the role of conflicts and how these conflicts might impact a financial professional’s motivation when providing investment advice. Despite the changes to presentation of fees, costs, conflicts, and standard of conduct relative to the proposal to increase clarity, we recognize the complexity of these issues. Accordingly, we recognize benefits to investors could be limited by investors’ potential lack of ability to comprehend the disclosure.1094 In the extreme, standards of conduct disclosure may also have a reverse effect of unduly enhancing investor trust in providers because investors may misperceive providers as holding themselves to a standard higher than legally required, and making investors discount the severity of the disclosed conflicts.1095 Because firms have some flexibility to decide what additional fees and costs to describe and, in the case of a firm with none of the enumerated conflicts, which conflict to use as an example, benefits could be reduced to the extent that they choose examples that are not informative to the retail investor. Additionally, there could be a cost to investors to the extent they believe the enumerated fees and conflicts in the relationship summary are the only fees and conflicts the firm has, although we believe that the required wording that explains the 1094 See supra footnotes, 378–382, 475–478, 522– 524, and accompanying text, for a discussion of comments and investor survey results on the comparative difficulty for investors to comprehend these disclosures. 1095 See, e.g., Betterment Letter I (Hotspex), supra footnote 18 (reporting that only 26% of participants correctly identified as false a statement that brokerdealers are held to a fiduciary standard). E:\FR\FM\12JYR2.SGM 12JYR2 33588 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations summarized conflicts are examples, as well as the required links to more information about fees and conflicts, mitigate the risk of this misperception. In addition, referencing academic research on the potential negative effects of conflicts of interest disclosure, several commenters expressed concerns that the proposed required disclosure of conflicts of interest in the relationship summary could lead to a ‘‘moral license’’ for financial professionals to provide even more biased advice and thus take unfair advantage of investors, or lead investors to fail to discount biased advice, trust their providers even more or make them feel pressured to remain in a potentially disadvantageous relationship, i.e., the panhandler effect.1096 Despite the changes we have made from the proposal to the required conflicts of interest disclosure in the final instructions, we acknowledge that there is still some risk for such negative unintended consequences. (3) Disciplinary History jbell on DSK3GLQ082PROD with RULES2 As proposed, the relationship summary will contain a section where firms must state in binary fashion whether or not they have disciplinary history, as well as include a reference to Investor.gov/CRS, where investors can conduct further search for additional information on those events.1097 We have made a change to increase the salience of this information relative to the proposal by making a separate Disciplinary History section, including its own question and required response, rather than—as proposed—including it with other content in an Additional Information section, which should increase any benefits or costs relative to the proposal. The primary benefit of the disciplinary history disclosure relative to the baseline is that investors will be alerted to a potential need to search and review their provider’s disciplinary information and will have a mechanism to find more information about any disciplinary history. Although this information already exists publicly, clearly linking to Investor.gov/CRS for further information about disciplinary history at the time investors are selecting a firm or financial professional will help retail investors know where to find additional information about those events, which should reduce search costs and is an improvement relative to 1096 See, e.g., Better Markets Letter; AARP Letter; Warren Letter; CFA Letter I; see also supra Section IV.C for a discussion of moral license. 1097 See supra Section II.B.4 for a discussion of the requirements and comments received on the proposal. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 the baseline.1098 The conversation starters also will provide investors with a cue to the importance of understanding the disciplinary history and could trigger more information gathering and ultimately more effective cognitive processing of this disclosure. As a result, an investor may choose to not engage a firm or financial professional if the disciplinary history is considered to be too problematic, or, if an investor chooses to proceed with a provider that has some concerning disciplinary history, awareness of those events could provide incentives to the investor to monitor his or her account more carefully than if she were not aware. The potential cost is that investors may overreact to the ‘‘yes’’ or ‘‘no’’ response reported in the Disciplinary History section. Investors may attribute the disciplinary history of one or few financial professionals at a firm to the entire firm, and thus choose not to select a provider that could be a good match for them (for example, a larger firm with more employees and thus a greater likelihood of disclosable events) 1099 or avoid hiring a financial professional altogether. Retail investors may also misinterpret a higher baseline rate of disciplinary history for brokerdealers than for investment advisers, given that the scope of events that trigger a disclosure event is arguably broader for broker-dealers than for investment advisers.1100 As a result, retail investors may avoid choosing a broker-dealer, even when such a relationship would be a better match for the investors. Relatedly, investors may over-rely on lack of disclosure of disciplinary history as evidence of more ethical conduct; however, lack of such disclosures may be due to unrelated factors such as a comparatively short history of a particular firm or fewer employees (and thus less likelihood of having employees with disclosable events). However, the risk of some investors misinterpreting, or overrelying on, the disciplinary history should be mitigated to the extent firms or financial professionals provide more information about and encourage retail investors to ask follow-up questions regarding the nature, scope, or severity of any disciplinary history. On balance, we believe the benefits to investors from 1098 See, e.g., RAND 2018, supra footnote 13 (when investors were asked why they would not look up disciplinary history, 37% of all respondents indicated that they did not know where to get the information, whereas 19% of all respondents indicated that it would take too much time or effort). 1099 See supra Section II.B.4. 1100 See id. PO 00000 Frm 00272 Fmt 4701 Sfmt 4700 including the disclosure on disciplinary history, as discussed above, justify any potential negative effects.1101 (4) Additional Information The relationship summary will conclude with a section where registrants will let investors know where investors can find additional information about their services and request a copy of the relationship summary, which should benefit investors relative to the baseline by providing this general resource, in addition to the links or references provided throughout the document.1102 In a change from the proposal, the Additional Information section eliminates the proposed requirement to provide information on how investors should report complaints about their investments, accounts, or financial professionals. Instead, we are requiring a conversation starter on whom investors should contact about their concerns. The benefit of this approach is that it improves readability of the form by reducing prescribed wording and potentially facilitates a conversation between investors and their financial professionals; the cost of this approach is that some investors will not have access to direct instructions on how to report their complaints. Finally, investors with limited or no access to internet (e.g., due to costs of internet access or due to a disability) will also benefit from a requirement that firms provide a number through which retail investors can request up-to-date information or a copy of the relationship summary. (5) Conversation Starters Disclosures currently required by investment advisers and broker-dealers generally do not have suggested questions for investors to ask their financial professional. The relationship summary will require firms to incorporate suggested follow-up questions for the investor to ask, which the instructions refer to as ‘‘conversation starters.’’ 1103 Conversation starters should benefit investors relative to the baseline by improving the potential to match investors with providers that provide services more suitable to the investors’ 1101 This view is supported by survey evidence that suggests that investors consider disciplinary history to be an important factor when searching for a provider of investment advice. See supra footnote 996; see also supra footnotes 566 and 567. 1102 See supra Section II.B.5 for a discussion of the requirements and comments received on the proposal. 1103 See supra Section II.B.2.c for a discussion of the requirements and comments received on the proposal. E:\FR\FM\12JYR2.SGM 12JYR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations preferences and needs. We believe that this is accomplished through enabling the investor to be more engaged, potentially assisting the investor with comprehension of relevant disclosures, and assisting the investor in receiving more personalized information than the firm-level disclosure documents, such as Form ADV or documents issued by broker-dealers. That is, to the extent that these conversation starters promote more transparency and better communication between investors and financial professionals, retail investors are more likely to understand the information and select the right firm or financial professional to meet their preferences and expectations. In addition, to the extent the conversation starters help increase investors’ engagement in a selected relationship it may also increase their monitoring of their relationship and more critically evaluate any advice or recommendations they receive. However, a closer personal engagement between retail investors and financial professionals may cause some investors to feel social pressure to act on the advice or recommendations of the professional due to a panhandler effect,1104 which may attenuate some of the benefits of the conversation starters. A potential cost associated with the conversation starters is that the particular required questions may anchor the attention of retail investors to those prescribed questions and reduce the likelihood that they would explore other potential questions that could be important to them based on their individualized circumstances. In response, we have reframed the proposed questions, which were at the end of the proposed relationship summary as ‘‘Key Questions,’’ and instead have integrated them within the relevant information item throughout the relationship summary to reduce the risk that investors only focus on this set of questions in their discussions.1105 Moreover, many of the conversation starter questions are broad and openended, which could further mitigate the risk of investors’ anchoring on the content of these questions at the expense of the other disclosures in the relationship summary. As pointed out by one commenter, unless the ‘‘Key Questions’’ in the relationship summary are provided to investors in advance, some retail investors may entirely ignore these 1104 See supra footnote 1028 and accompanying text. questions.1106 As discussed above, the final rules incorporate the questions as ‘‘conversation starters’’ directly in the different sections of the relationship summary, which should increase their salience and reduce the risk of them being ignored by investors compared to the proposal. In addition, because the relationship summaries will be available to investors online on firms’ websites or through Investor.gov/CRS, the relationship summaries may be downloaded and accessed by some investors prior to meeting a financial professional, which would give such investors the opportunity to review the conversation starters before meeting a financial professional. e. Filing, Delivery, and Updating Requirements (1) Filing Requirements The final instructions require firms to file their relationship summaries with the Commission (using IARD, Web CRD®, or both, as applicable), and make their relationship summaries available on their websites. In addition to firms’ websites, firms’ most recent relationship summaries will be accessible to the public through IAPD and BrokerCheck, public interfaces of IARD and Web CRD®, respectively. Investors also will be able to use the Commission’s website Investor.gov, which has a search tool on its main landing page and at Investor.gov/CRS that links to BrokerCheck and IAPD. If investors prefer, they may request copies of firms’ relationship summaries by calling the numbers that firms must include in their relationship summaries. We expect that making firms’ relationship summaries accessible in these ways should reduce investor search costs in connection with selecting investment firms or financial professionals. We also believe that retail investors could benefit from their ability to access the relationship summaries independently through the companies’ websites, BrokerCheck, IAPD, or Investor.gov prior to any contact with a financial professional. Such access could increase retail investors’ understanding about differences between firms and financial professionals even before approaching a particular firm or financial professional, which could reduce search costs for investors early on in the search process and further reduce the risk of a mismatched relationship. The online availability of the relationship summaries will also enable investors who are currently not participating in the market to become better informed supra Section II.A.4. for discussion on conversation starters. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 about the market for financial advice and the particular relationships provided without the need to incur the cost of actively contacting a firm or financial professional, which may ultimately encourage them to seek out a relationship with a provider. In addition, the online availability of the relationship summaries in central locations and the machine-readable headers of the summaries will allow third-party data aggregators to more easily collect relationship summaries and facilitate the development of comparison tools for the investing public. To the extent such tools and metrics are developed, it could facilitate investors’ searches by helping them narrow the set of available financial service providers to those that are most likely to provide a good match. However, the benefits to investors from the development of such tools will be mitigated by any fees charged by thirdparty aggregators for access to the tools. (2) Delivery and Updating Requirements Firms will deliver a relationship summary to each new or prospective retail investor based on the initial delivery triggers specific to investment advisers, broker-dealers, and dual registrants.1107 Firms also must deliver the relationship summary to existing clients and customers who are retail investors in certain circumstances.1108 For these existing clients and customers, the final rules require that firms deliver the relationship summary (including updates) in a manner consistent with the Commission’s electronic delivery guidance and the firm’s existing arrangement with that client or customer.1109 Because retail investors may face substantial switching costs when they move from one financial professional to another, the benefits associated with finding a good match may be particularly significant. Accordingly, investors’ benefits should increase in accordance with their ability to understand and compare relationship summaries, which may take time. We recognize that, as some commenters noted, if a financial professional delivers the relationship summary at the time of service, retail investors may not have sufficient time to thoroughly evaluate the financial professional or may have already made a preliminary decision to engage the particular financial professional by the time they receive the relationship summary. As discussed above, however, there are 1107 See supra Section II.C.3.b. supra Section II.C.3.c. 1109 See supra Section II.C.3.a. 1108 See 1105 See 1106 See CFA Institute Letter I. Frm 00273 Fmt 4701 Sfmt 4700 33589 E:\FR\FM\12JYR2.SGM 12JYR2 jbell on DSK3GLQ082PROD with RULES2 33590 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations compliance uncertainties and other costs associated with requiring a relationship summary be delivered at first contact or requiring a waiting period, as suggested by some commenters.1110 First contact between an investor and a financial professional may include circumstances that are not limited to the seeking of investment advice, such as business interactions for other purposes or social interactions. In addition, as noted by commenters, a waiting period may prevent investors from meeting certain deadlines.1111 As we discuss above, the availability of relationship summaries online may mitigate the concern that retail investors will not have enough time to review them, to the extent that it provides retail investors an opportunity to compare firms before contacting them to obtain services. We expect that the rules regarding form of delivery—electronic or paper— generally will be beneficial for retail investors relative to the baseline by enabling a form of delivery that is a good match for the particular retail investor. For retail investors who prefer electronic delivery, electronic forms of delivery should facilitate both the engagement with and the processing of the disclosed information, particularly the required and optional hyperlinks and other features. For the investors who prefer paper documents, paper delivery should result in greater likelihood of the investor paying attention to the relationship summary disclosures. We believe that maintaining the mode of delivery consistent with the way information was requested for new customers and consistent with existing arrangements for existing customers will help to further ensure that the investors will not miss and will process the information contained in the relationship summaries. Customers requesting the relationship summary in paper format may be less likely to access the additional information available through the electronic means of access discussed above, which could result in their inability to process potentially important additional information. We also believe that existing clients and customers of broker-dealers and investment advisers that are retail investors will benefit from the requirement that firms deliver the relationship summary again if they: (i) Open a new account that is different from the retail investor’s existing account(s); (ii) recommend that the 1110 See supra footnotes 720–724 and accompanying text. 1111 See supra footnote 719 and accompanying text. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) recommend or provide a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account, for example, the first time purchase of a direct-sold mutual fund or insurance product that is a security through a ‘‘check and application’’ process, i.e., not held directly within an account. This requirement should have the benefit of increasing retail investors’ attention to disclosures provided in the relationship summary and the implications of new services or account options at the time of that decision. Additionally, the instructions require firms to update their relationship summaries to existing retail clients or customers if the existing relationship summary becomes materially inaccurate, which would include information that is materially outdated or materially incomplete. Firms must communicate the changes by delivering the amended relationship summary or by communicating the information through another disclosure that is delivered to the retail investor. Firms delivering the amended relationship summary must highlight the most recent changes by, for example, marking the revised text or including a summary of material changes and attaching the changes as an exhibit to the unmarked amended relationship summary. Investors should benefit from receiving updated relationship summaries under these circumstances because this information is relevant to the decision of whether to enter into new services or continue existing services, based upon whether the new or existing services match or continue to match their preferences and expectations. The requirement to attach revised text or a summary of material changes to the amended relationship summary should benefit retail investors by helping them to process the new information quickly. However, we recognize that to the extent that retail investors with established financial professional relationships tend to remain in such relationships, it may attenuate the benefits of receiving the relationship summary again. 2. Broker-Dealers and Investment Advisers (Registrants) a. Benefits to Registrants Beyond benefits to retail investors, we also expect broker-dealers and investment advisers potentially to PO 00000 Frm 00274 Fmt 4701 Sfmt 4700 benefit from the relationship summary. Some retail investors, who could benefit from obtaining advice and other services from financial professionals, currently may choose to stay out of the market for financial services because they do not understand what type of firm or financial professional they require. The relationship summary may provide a clear and concise document that may draw new investors to the market. If the relationship summary draws new retail investors to the market for financial services, both broker-dealers and investment advisers may gain new customers and clients, respectively. An increase in new retail investors could enhance revenues for firms and financial professionals, although firms and financial professionals could also bear additional costs, which are discussed below. Moreover, the relationship summary could provide additional benefits to firms and financial professionals by improving the efficiency of the search process in the market for financial advice. For example, retail investors will be able to access and obtain relationship summaries for any number of firms online, including both brokerdealers and investment advisers. To the extent investors use this feature at the start of their search for a firm, they are more likely to opt to approach only firms that ex ante meet their preferences and expectations. Thus, broker-dealers and investment advisers may be less likely to expend time and effort meeting and discussing their business model and services with prospective customers and clients, who are seeking a different kind of relationship and that would ultimately not engage in a relationship with the firm or financial professional. Instead, firms and financial professionals can devote their efforts to acquiring customers and clients that are more likely to contract for their services. In addition, to the extent the relationship summary leads to fewer retail investors entering or remaining in a mismatched relationship that does not meet their expectations, it may benefit firms by reducing costly customer complaints and arbitrations. While some commenters suggested that brokers have incentives to provide ineffective disclosures,1112 academic studies show that sellers can benefit from better disclosure of product quality information to the buyers, and competitive sellers thus have incentives to disclose better information.1113 While 1112 See, e.g., CFA Letter; Warren Letter. Tadelis & Florian Zettelmeyer, Information Disclosure as a Matching Mechanism: Theory and Evidence from a Field Experiment, 105 1113 Steven E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations some disclosure documents may contain topics of material that investors may not understand or prioritize, the relationship summary has been designed to focus on issues already identified by retail investors to be of first-order importance with respect to their relationship with their financial professional,1114 such as fees and costs, conflicts of interest, and disciplinary history of firms and financial professionals, among other items.1115 Further, the relationship summary is intended to be clear, concise, and readable, while permitting firms the flexibility to provide information pertinent to their business model and services offered. Finally, firms may benefit from providing more clear and understandable disclosures to the extent it will facilitate a more efficient matching process with prospective investors. Firms could also bear potential legal liability 1116 and reputational costs as a result of providing potentially less transparent disclosures. For these reasons we believe registrants will generally have incentives to use the discretion permitted in the final instructions to design a relationship summary that is effective at informing retail investors about the nature of their business and offerings. The magnitude of the anticipated benefits discussed above will depend on a number of factors, including the extent to which investors’ will change their behavior as a result of receiving the relationship summary and how firms and financial professionals will react to such a change. Given the number and complexity of assumptions that would be required to be able to estimate how the relationship summary will affect investors’ understanding and their decision-making, and the lack of data on relevant characteristics of individual firms and their prospective and existing retail investors, the Commission is not able to meaningfully quantify the magnitude of these anticipated benefits. jbell on DSK3GLQ082PROD with RULES2 b. Costs to Registrants The final rule will also impose costs on affected broker-dealers and investment advisers, including: costs associated with preparation, filing, Am. Econ. Rev. 886 (2015); see also Tao Zhang, et al., Information disclosure strategies for the intermediary and competitive sellers, 271 Eur. J. Operational Res. 1156 (2018). 1114 RAND 2018, supra footnote 13 (survey results re: Importance of each topic to respondents). 1115 See supra Section IV.B.3.b. 1116 See supra footnotes 92–105 and accompanying text (discussing the parameters for the scope of information expected within the relationship summary and the antifraud standard as applied to the relationship summary). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 delivery, and firm-wide implementation of the relationship summary; costs of the associated recordkeeping rules; and as well as training, monitoring, and supervision for compliance. We expect that these costs may differ across firms depending on their type (broker-dealer or investment adviser), size, and complexity of business. We discuss these costs in more detail below. The Commission has, where possible, quantified the costs expected to result from the final rules in the analysis below. However, we are unable to quantify some of the potential costs discussed below, because of the number and complexity of assumptions that would be required to be able to estimate how the relationship summary will affect investors’ understanding and choice of financial services provider and the lack of data on relevant characteristics of individual firms and their prospective and existing retail investors. (1) Preparation, Implementation, and Content Registrants will incur costs in connection with preparing and implementing the relationship summary. With respect to aggregate compliance costs, as discussed in more detail below, some commenters suggest these costs could be high.1117 One commenter provided a survey of financial professionals that indicate that 79% of survey participants agree that implementation costs may be higher at first but will likely lessen over time, and 40% of firms in the same survey anticipate moderate or substantial time to implement the requirements of Form CRS (and Regulation Best Interest).1118 Broker-dealers currently are not required to prepare a consolidated disclosure document for their customers similar to the Form ADV, Part 2A brochure and may incur comparatively greater costs in preparing the relationship summary than investment advisers, given that investment advisers can draw on their experience with preparing and distributing Form ADV Part 2A. The Commission believes that costs of preparation would also fall differently 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 1117 See infra Sections V.A.1 and V.D.1 for examples of commenters discussing the costs. 1118 See CCMC Letter (Survey conducted by FTI Consulting of 30 individuals at 15 broker-dealers and dually-registered firms representing $23.1 trillion in assets under management and administration (AUM/AUA), and 78.54 million investment accounts). PO 00000 Frm 00275 Fmt 4701 Sfmt 4700 33591 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. The relationship summary requires the use of standardized headings in a prescribed order, while permitting some flexibility in other aspects of the relationship summary’s wording and design within the parameters of the instructions. There is a trade-off in terms of preparation costs to registrants between requirements that prescribe specific wording and formats for disclosures and requirements that do not provide any prescribed language and format. For example, we would expect that the more extensively the relationship summary would rely on prescribed format and wording, the lower the preparation costs for providers, because there would be less need for them to devote resources to construct their own format and wording. On the other hand, the more extensively the relationship summary would rely on prescribed format and wording, the more likely it would turn into a ‘‘onesize-fits-all’’ document with largely boilerplate language, and firms would lose the benefit of being able to more precisely and accurately describe their own business and offerings to investors. We believe the final instructions strike an appropriate balance in this trade-off, with some higher-level prescribed format and language, such as the standardized language and order of headings, while firms generally will be able to (and have to) choose their own wording and organization of the required information under each heading. The final instructions provide for more flexibility than the proposed instructions. We acknowledge that this change could increase certain compliance costs relative to the proposal, as firms will have to develop more of their own wording and organization of the information that is required to be included. However, the flexibility permitted by the final instructions is mainly in terms of the wording while the topics and sub-topics of information that are required to be discussed are largely proscribed. This narrows the field of subjects that firms could choose to discuss and potentially mitigates the cost increase from additional flexibility. Moreover, we believe that the expected benefits of this additional flexibility justify this cost increase. In particular, we expect this change from the proposal to benefit firms by allowing them to more E:\FR\FM\12JYR2.SGM 12JYR2 33592 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 accurately describe their services and offerings to retail investors.1119 We also expect the additional flexibility to benefit both firms and retail investors to the extent it results in disclosures that are more engaging and useful to investors and mitigates the possibility of a mismatch. In addition, several commenters requested greater flexibility to provide accurate descriptions of their business models and services, noting the potential for liability for prescribed disclosures in the proposal that might not be accurate for a particular registrant’s business.1120 Some topics, however, will require firms to use prescribed wording, such as the headings, conversation starters, statement of their legal standard of conduct, and two statements related to fees and costs, for the reasons generally discussed in Section II.A.1.1121 In a change from the proposed instructions, the final instructions encourage rather than require dual registrants and affiliates to prepare one single relationship summary, but also allow them to instead prepare two separate relationship summaries.1122 In addition, if firms prepare one combined relationship summary, the final instructions required them to employ design elements of their own choosing to promote comparability, rather than the two-column format, as prescribed in the proposed instructions. This increased flexibility in presentation relative to the proposal can benefit dual registrants and affiliates because it allows them to design disclosures more suitable to their business models. For example, a firm which generally is marketing both sides of its business to retail investors may find it less costly and/or more beneficial to provide a combined summary. However, dual registrants for which either the brokerage or investment advisory side of their business is not generally marketed to most customers or clients may find it more beneficial to provide two separate relationship summaries. If a firm chooses to prepare two distinct relationship summaries, it may incur an extra cost of preparing the second summary, but we expect firms will only elect to prepare two separate summaries if they believe the benefits of separate 1119 See, e.g., SIFMA Letter requesting greater flexibility for this reason (stating that ‘‘greater flexibility is needed to accommodate various business models, given that different firms offer different products and services’’). 1120 See generally footnotes 76–83 and accompanying text. 1121 See supra footnotes 85–90 and accompanying text. 1122 See supra Section II.A.5. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 summaries justify such additional preparation costs. Beyond the more general costs discussed above from the prescribed formatting and wording requirements, some specific requirements may be costly for certain firms. For example, because the relationship summary requires information to be organized by standardized headings in a prescribed order, some firms may find it difficult to effectively present the most salient information specific to their business and services. As such, certain firms may incur costs associated with trying to fit their business model and other relevant information into the standardized headings. This is mitigated by the fact they have flexibility to present the required sub-topics of information in the order of their choosing within each subtopic and by firms’ ability to omit irrelevant information. Firms and financial professionals also may bear costs in providing additional information to potential or existing investors to clarify any information that is salient to their business but does not fit into the standardized headings of the relationship summary. These costs are mitigated by firms’ ability to supplement their relationship summaries with cross-references or hyperlinks to additional information. The page limit for the relationship summary also has potential costs, particularly for firms with complex business models, even under the increased flexibility provided by the final instructions, because they would have to distill the complexity of their business into the same space as less complex firms. The use of layered disclosure, through mediums such as hyperlinks, will permit firms to provide more detailed information that may ameliorate this cost to some extent, while still adhering to the formatting requirements of the relationship summary. Firms will also incur costs associated with the production and verification of information in the relationship summary. Although some of the information that will be summarized in the relationship summary is contained in other disclosures that firms already provide, firms will bear the cost of editing this information for the relationship summary and crossreferencing or hyperlinking to additional information. For example, to the extent that some firms do not already have in place a concise description of how fees, costs, conflicts, and standards of conduct are potentially connected, that also will allow for meeting the relationship summary’s space constraints, firms will have to PO 00000 Frm 00276 Fmt 4701 Sfmt 4700 expend time and effort to develop an accurate, clear, and concise description of these items, written in plain English, for insertion into the relationship summary, and cross-referencing or hyperlinking to additional information about these items. These costs may be larger for broker-dealers than for investment advisers, who can directly draw on the disclosures of fees, costs, and conflicts they have to provide to retail investors in Part 2 of Form ADV. Also, to the extent the costs of developing this section have a fixed component, the relative burden of developing this section may be higher for smaller firms. On the other hand, smaller firms are likely to have fewer types of fees, costs, and conflicts to report compared to larger firms, potentially making it less burdensome for them to summarize the required information. In addition, the relationship summary requires ‘‘conversation starters’’ as part of each section, and the conversation starters must be highlighted through text features to improve their prominence relative to other discussion text. Firms will incur costs associated with the conversation starters, particularly with respect to preparation and training on how financial professionals provide accurate and complete responses to the ‘‘conversation starters’’ when asked. We do not have access to data and information that would allow us to estimate these costs to firms, but we expect them to be comparatively greater for firms with more complex business, a wider range of offered services and products, because training and supervision costs for such firms could be more extensive. For firms that provide automated investment advisory or brokerage services, those firms will incur burdens to prepare answers to each conversation starter question and make those available on the firm’s website (while providing in the relationship summary a means of facilitating access, e.g., by providing a hyperlink, to that section or page).1123 We also anticipate that firms will bear some costs in the production of the electronic format as well as other graphical elements, such as charts and tables, which may make important information more salient to investors. Smaller firms may disproportionately incur costs associated with electronic and graphical formatting, particularly if they do not have an existing web presence or currently produce brochures or other disclosures that make use of graphical formatting. However, because the final instructions encourage, but do 1123 See E:\FR\FM\12JYR2.SGM supra footnote 184. 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 not require electronic formatting and graphical, text, and online features, firms would only bear these costs if they expected these features to provide benefits that justify these costs. Finally, there could also be some indirect costs to firms from some of the required content in the relationship summary. In particular, 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, firms that affirm they have one or more reportable disciplinary events may face a loss in competitiveness compared to firms that have no event to report. This can in particular be costly for firms that have few or less serious disciplinary events that may be overlooked by investors that do not research the nature of the disciplinary history in more detail.1124 We also recognize larger firms might be more likely to incur such competitive costs, because larger firms are more likely to have at least one reportable disciplinary event than smaller firms. Similarly, holding size constant, older firms, by virtue of having a longer business history, are more likely to have one or more reportable events than younger firms. Although we acknowledge the potential for firms to incur competitive costs from having to affirm they have reportable disciplinary history, those costs are justified by the potential benefits to investors from this disclosure, as discussed above. (2) Filing, Delivery, and Updating Requirements As proposed, the final instructions require firms to file their relationship summaries with the Commission and make them available on firms’ publicly available websites, if they have one. The relationship summary must be filed in a text-searchable format with machinereadable headings. Further, the final instructions will require investment advisers to file their relationship summaries using IARD, as proposed; however, the final instructions—in a change from the proposal—will require broker-dealers to file through Web CRD® instead of EDGAR. This should reduce overall burdens relative to the proposal as broker-dealers already have extensive experience filing on Web CRD®, which is more accessible for broker-dealers. As proposed, dual registrants will be required to file on two systems. Instead of filing on EDGAR and IARD, as proposed, dual registrants will be 1124 Commenters raised similar concerns. See supra footnote 586 and accompanying text. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 required to file using both Web CRD® and IARD. We recognize that requiring dual registrants to file using both Web CRD® and IARD may be more costly than filing through just one system; however, we believe that any such cost is justified to ensure a complete and consistent filing record for each firm and to facilitate the Commission’s data analysis, examinations, and other regulatory efforts. As discussed above, the firms that deliver relationship summaries electronically must do so within the framework of the existing Commission guidance regarding electronic delivery.1125 With respect to initial delivery of the relationship summary to new or prospective investors, firm are required to deliver the relationship summary in a manner consistent with how the retail investor requested information, consistent with the Commission’s electronic delivery guidance.1126 Flexibility in the method of delivery, consistent with Commission guidance, could promote efficiency by allowing firms to communicate with retail investors in the same medium by which they typically communicate other information.1127 Regardless of the method of delivery (e.g., paper or electronic delivery), firms will incur costs associated with delivering the relationship summary to retail investors. Moreover, requiring firms to make a copy of the relationship summary available upon request without charge will require firms to incur costs. For example, firms that provide a paper version of the relationship summary to retail customers that request it will incur printing and mailing costs when such requests are made. Further, firms may incur additional costs associated with systems for tracking customer delivery preferences. Firms will also incur costs for updating and filing the relationship summary within 30 days of whenever any information becomes materially inaccurate.1128 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 supra Section II.B.3 and footnote 678. supra footnotes 679–681 and accompanying text. 1127 See supra Section II.B.3 and footnote 680. 1128 Along this line, firms could also incur some costs in modifying certain referenced disclosures per the parameters of General Instruction 3.B to Form CRS. PO 00000 33593 ADV brochure or Form ADV summary of material changes containing the updated information, the ability to disclose material changes by delivering another required disclosure containing the updated information should mitigate the cost of the requirement to communicate updated information in the relationship summary to investors. Firms could also incur costs to keep records of when the initial or updated relationship summary was delivered; however, we believe that firms will be able to leverage their current compliance infrastructures in maintaining such information. The Commission anticipates that the costs associated with delivery for an average broker-dealer or average dual registrant will be higher than the costs for the average investment adviser. As Table 1 and Table 3 in Section IV.A.1 indicate, broker-dealers maintain a larger number of accounts than investment advisers; 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 investors.1129 Similarly, given that the average dual registrant has more customer accounts than the average investment adviser, and that the preparation of relationship summaries and any updates for dual registrants may require more effort than for standalone broker-dealers or investment advisers, the compliance costs could be larger for those firms. Firms will be required to deliver the relationship summary to retail investors. The final instructions have adopted a definition of retail investor that is similar to the definition of retail customer in Regulation Best Interest, but differs to reflect the differences between the relationship summary delivery requirement and the obligations of broker-dealers under Regulation Best Interest, including that the retail investor definition covers prospective as well as existing clients and customers and natural persons who seek services from investment advisers as well as broker-dealers. This definition of retail investor relative to the proposal may reduce uncertainty for broker-dealers and investment advisers about which customers should obtain relationship summaries. We do not believe this changes the scope of retail investors that will benefit collectively from the final rules. 1125 See 1126 See Frm 00277 Fmt 4701 Sfmt 4700 1129 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. E:\FR\FM\12JYR2.SGM 12JYR2 33594 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 (3) Recordkeeping Amendments As adopted and discussed above, firms will be required to make and preserve records of each version of their relationship summary and each amendment filed with the Commission. Firms will also be required to make and preserve a record of the dates that each relationship summary was given to any client, customer, or prospective client or customer who subsequently becomes a client or customer and such records will be maintained in the same manner, and for the same period of time, as other books and records under the applicable recordkeeping rules. As previously discussed, commenters stated that they believe the requirement to maintain records of the dates that the relationship summary was given to prospective clients or customers may impose significant and unnecessary costs and burdens.1130 Commenters stated that firms do not have compliance and recordkeeping systems in place that could, without substantial and costly modification, maintain records of related to prospective clients or customers who might not become actual clients or customers of the firms for weeks, months or years after firms begin communicating with such individuals. As an alternative, commenters suggested that firms only be required to maintain a record of the most recent date they delivered the relationship summary to a prospective client that becomes an actual client preceding the opening of an account. Commenters suggested only requiring a record that the relationship summary was delivered at account opening or when a retail investor becomes an investment advisory client. The inclusion of the recordkeeping requirements in the amended rules will impose costs on firms in the form of revised recordkeeping policies and procedures and possible modifications to their recordkeeping systems. The record requirements, however, may be less burdensome if their recordkeeping and compliance systems are already capable of creating and maintaining records related to communications with prospective clients. For example, investment advisers are required to keep similar records for the delivery of the Form ADV Part 2 brochure and brokerdealers are subject to comparable recordkeeping requirements with respect to communications and correspondence with prospective retail investors.1131 Further, these recordkeeping requirements may benefit firms by assisting them in monitoring 1130 See, 1131 See e.g., Edward Jones Letter. supra footnote 810. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 their compliance with the relationship summary delivery requirements. Finally, these records will facilitate the Commission’s ability to inspect for and enforce compliance with the relationship summary requirements. (4) Estimates of Certain Compliance Costs Although we are unable to quantify all costs discussed above, we quantify certain direct compliance costs based on the estimates developed for the purpose of the Paperwork Reduction Act analysis in Section V. These costs, which we discuss below, are estimated separately for investment advisers and broker-dealers that are required to prepare and file a relationship summary. We note that all aggregate cost estimates for either category of firms include the 318 dually registered firms.1132 In addition, the costs estimates are calculated for the average investment adviser or average brokerdealer. We recognize that the actual compliance costs burdens for some firms will exceed our estimates and the burden for others will be less because firms vary in the size and complexity of their business models. First, we quantify certain one-time costs associated with the initial preparation and filing of the relationship summary. The cost burden for an average investment adviser to initially prepare and file the proposed Form CRS for the first time is estimated to range between approximately $5,460 and $9,165, depending on the extent to which external help is used.1133 The estimated aggregate non-amortized combined internal and external costs for all current investment advisers of initially preparing and filing the relationship summary will be approximately $65.3 million.1134 In 1132 See supra footnote 863 and accompanying text. 1133 The lower end estimate is based on the assessment that, without additional external help, it will take an average investment adviser 20 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 $237 and $309 per hour, (see infra footnote 1232 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 $5,460 (10 hours × $237 + 10 hours × $309 = $5,460) 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 $3,705, see infra footnote 1239, which brings the total cost to $9,165. 1134 We estimate that the aggregate internal cost of initial preparation and filing of the relationship summary for existing investment advisers is $44,963,100 (= $5,460 per investment adviser × PO 00000 Frm 00278 Fmt 4701 Sfmt 4700 addition, based on IARD system data, the Commission estimates that each year approximately 656 newly investment advisers will be required to prepare and file the relationship summary with us.1135 The aggregate non-amortized initial preparation and filing costs of the relationship summary for these new investment advisers is estimated to be approximately $5.2 million.1136 Similarly, for broker-dealers, the cost to an average broker-dealer for preparing Form CRS for the first time is estimated to range between approximately $10,920 and $14,625.1137 We estimate the aggregate non-amortized aggregate combined internal and external costs to all current broker-dealers of initially preparing and filing the relationship summary will be approximately $38.8 million.1138 We do not expect any new broker-dealer firms based on the secular decline in broker-dealer firms we have seen in recent years.1139 Firms will also incur one-time costs of the initial delivery of relationship summaries to their existing retail investors. We expect the non-amortized initial delivery costs to be 8,235 existing investment advisers). The aggregate external cost for existing investment advisers is estimated to be $20,371,331. See infra Sections V.A.2.a and V.A.2.b for more detailed descriptions of how we arrived at these estimates. 1135 See infra footnote 1227 and accompanying text. 1136 We estimate that the aggregate internal cost of initial preparation and filing of the relationship summary for expected newly registered investment advisers is $3,3,581,760 (= $5,460 per investment adviser × 656 expected new investment advisers). The aggregate external cost for expected new investment advisers is estimated to be $1,622,780. See infra Sections V.A.2.a and V.A.2.b for more detailed descriptions of how we arrived at these estimates. 1137 The lower end estimate is based on the assessment that, without additional external help, it will take an average broker-dealer 40 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 $237 and $309 per hour, respectively (see infra footnote 1365 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 at $10,920 (20 hours × $237 + 20 hours × $309 = $10,920) 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 $3,705, see infra footnote 1378, which brings the total cost to $14,625. 1138 We estimate that the aggregate internal cost of initial preparation and filing of the relationship summary for existing broker-dealers is $30,204,720 (= $10,920 per broker-dealer × 2,766 existing broker-dealers). The aggregate external cost for existing broker-dealers is estimated to be $8,560,770. See infra Sections V.D.2.a and V.D.2.b for more detailed descriptions of how we arrived at these estimates. 1139 See infra Section IV.B.c for a discussion of this decline. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 approximately $4,941 for the average investment adviser. 1140 In total, we estimate that the aggregate nonamortized initial delivery costs to existing retail investors will be approximately $40.7 million for all current investment advisers,1141 and $3.2 million for newly registered investment advisers.1142 For the average broker dealer, we expect costs for the initial delivery to existing retail investors to be approximately $45,801.1143 The aggregate nonamortized initial delivery cost for all current broker-dealers is estimated to be approximately $126.7 million.1144 Moreover, firms are required to post a current version of their relationship summary prominently on their public website (if they have one). We estimate that the initial posting will cost approximately $93 per firm (whether an investment adviser or a brokerdealer).1145 In aggregate we expect the initial cost of posting the relationship summary to firms’ websites to be approximately $686,437 for existing investment advisers,1146 $54,682 for newly registered investment advisers,1147 and $257,238 for brokerdealers.1148 In addition to the estimates of onetime costs discussed above, for the purposes of the Paperwork Reduction Act analysis, we have also developed estimates of certain expected ongoing compliance costs of the final rules. For example, firms will incur costs each year due to the requirement to re-deliver the relationship summary to existing retail investors in certain situations. We estimate that the annual average cost to re-deliver the relationship summary will 1140 See supra Section V.C.2.b.(1) for a description of how this is estimated. 1141 Calculated as $4,941 per firm × 8,235 current firms = $40,689,135. 1142 Calculated as $4,941 per firm × 656 expected new firms = $3,241,296. 1143 Calculated as $126,684,600 (the estimated aggregate costs)/2,766 (number of broker-dealers with retail customers). See infra Section V.D.2.d. (1) for how the aggregate cost is estimated. 1144 Id. 1145 See infra sections V.C.2.a (for investment advisers) and V.D.2.a (for broker-dealers) for how the average cost per firm is estimated. 1146 Based on IARD system data, 91.6% of investment advisers with individual clients report having at least one public website; see infra Section IV.B.2.a. Therefore the aggregate cost for existing investment advisers is estimated as: 91.6% × $91(average cost per firm) × 8,235 (number of existing investment advisers) = $686,437. 1147 Assuming that the fraction of firms with at least one public website is the same for newly registered investment advisers as it is for existing investment advisers (see id), we estimate the aggregate costs as: 91.6% × $91(average cost per firm) × 8,235 (excepted number of new investment advisers) = $54,682. 1148 See infra footnote 1370 and accompanying text. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 be approximately $992 for an average investment adviser and in aggregate approximately $8.8 million annually for all investment advisers.1149 For brokerdealers, we estimate that the annual average cost to re-deliver the relationship summary will be approximately $9,222 for the average firm, and in aggregate approximately $25.5 million annually for all brokerdealers.1150 Firms will also be required to deliver relationship summaries to new and prospective retail investors. Based on the Commission’s projections of future client and customer account growth, we estimate that the annual costs to current firms of delivery to new and prospective retail investors would be between approximately $223 for an average investment adviser and $5,072 for an average broker-dealer, or approximately $1.8 million annually in aggregate for investment advisers and approximately $14.0 million annually in aggregate for broker-dealers.1151 The difference in cost estimates between investment advisers and broker-dealers is mainly due to the fact that investment advisers serving retail investors generally have fewer clients than broker-dealers serving retail investors have customer accounts, but also because we project a lower growth rate for retail clients for investment advisers (4.5%) 1152 than for retail customer accounts for broker-dealers (11.0%).1153 In addition, firms will also incur costs associated with making paper copies of the relationship summary available upon request. We estimate that such annual costs would be approximately $31 for the average firm (whether investment adviser or broker-dealer), and the aggregate annual costs for investment advisers and broker-dealers combined would be approximately $338,272.1154 In Section V, for the purposes of the Paperwork Reduction Act analysis, we also estimate the quantifiable expected ongoing costs associated with updating the relationship summary. These costs would be associated with preparing updated relationship summaries when information becomes materially infra Section V.C.2.b.(2). infra Section V.D.2.d.(2). 1151 See infra section V.C.2.c for how we estimate the costs to investment advisers, and see infra Section V.D.2.e for how we estimate the costs for broker-dealers. 1152 See infra footnote 1341 and accompanying text. 1153 See infra footnote 1415 and accompanying text. 1154 See infra footnote 1339 and accompanying text for how we estimate the costs for investment advisers, and see infra footnote 1413 and accompanying text for how we estimate the costs for broker-dealers. PO 00000 1149 See 1150 See Frm 00279 Fmt 4701 Sfmt 4700 33595 inaccurate, re-posting updated relationship summaries to a public website, and communicating changes to the relationship summary through redelivery to existing retail investors. We estimate that the annual costs for firms to update and file amended relationship summaries will be approximately $467 for the average investment adviser, or approximately $3.8 million in aggregate for all investment advisers.1155 For investment advisers with a public website, we estimate the average annual costs of re-posting amended relationship summaries to be approximately $53.32 per adviser, or $402,207 in aggregate for all investment advisers with public websites.1156 Finally, we expect investment advisers will incur quantifiable costs of communicating changes to amended relationship summaries, if they choose to do so by delivery. We estimate the average annual costs of communicating changes to amended relationship summaries by delivery will be $8,450 per adviser that to choose to do so, and in aggregate approximately $34.8 million for all investment advisers that we expect to choose delivery to communicate updated information.1157 For brokerdealers, we estimate the annual costs to update, file, and post amended relationship summaries will be approximately $608 for the average firm and approximately $1.7 million in aggregate for all broker-dealers.1158 We estimate annual delivery costs will be approximately $ 91,602 for the average broker-dealer that will choose delivery to communicate updated information, and in aggregate approximately $126.7 million annually for all broker-dealers that we expect to choose delivery.1159 Finally, for the purposes of the Paperwork Reduction Act analysis, we also developed estimates of certain compliance costs associated with the recordkeeping requirements in the final rules. We estimate that the annual costs to firms related to these recordkeeping requirements will be $12.67 for an average investment adviser and approximately $104,354 in aggregate for all investment advisers. 1160 For broker1155 See infra Section V.A.2.c for how we estimate these costs. 1156 See infra Section V.C.2.b.(3) for how we estimate these costs. 1157 Id. 1158 See infra Section V.D.2.c for how we estimate these costs. 1159 See infra Section V.D.2.d.(3) for how we estimate these costs. 1160 For investment advisers we estimate 0.2 additional burden hours related to the recordkeeping requirements in the final rule; see infra footnote 1280 and accompanying text. We expect that this incremental burden will most likely E:\FR\FM\12JYR2.SGM Continued 12JYR2 33596 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations dealers, we estimate annual recordkeeping and record retention costs to be approximately $39 for an average broker-dealer, and $107,017 in aggregate for all broker-dealers.1161 3. Impact on Efficiency, Competition, and Capital Formation In addition to the specific benefits and costs discussed in the previous section, we expect that the relationship summary could produce a number of broader long-term effects on the market for financial advice. Below, we elaborate on these potential effects, in particular as they pertain to their impact on efficiency, competition, and capital formation. a. Efficiency jbell on DSK3GLQ082PROD with RULES2 The final rule requiring brokerdealers, investment advisers, and dually registered firms to produce a relationship summary could result in increased informational or allocative efficiency for retail investors by reducing the risk of matching with a firm or financial professional that is different from the investor’s expectations and preferences. As discussed above, the risk of mismatch potentially imposes costs on investors, financial professionals, and firms. Investors may inadvertently, in the absence of information provided by the relationship summary, select the wrong type of financial professional or account, leading to increased costs (direct and indirect) and potentially suboptimal outcomes as it pertains to meeting the investor’s financial goals. For firms and financial professionals, cultivating relationships with potential investors requires resources in terms of time and effort. If an investor and financial professional or firm is mismatched, then both sides of the relationship can incur costs. For example, the financial professional may devote time and resources to develop a relationship with a retail investor that is comparatively costly to maintain because of a mismatch between the investor’s expectations and the services be allocated between compliance clerks and general clerks, with compliance clerks performing 17% of the function at a total cost of $70 per hours, and general clerks performing 83% of the function at total cost of $62 per hour; see infra footnote 1282. The average costs per investment adviser is then estimated as (17% × 0.2 hours × $70) + (83% × 0.2 hours × $62) = $12.672. The aggregate cost is then $12.672 × 8,235 (number of investment advisers) = $104,354. 1161 See infra Section V.E for the estimation of recordkeeping costs (estimated at $32 annually per broker-dealer, or $87,627 in aggregate), and see infra section V.F.1 for the estimation of record retention costs (estimated at $7 annually per broker-dealer, or $19,390 in aggregate). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 offered by the professional,1162 and the investor incurs costs associated with obtaining services that do not fit his or her needs. As such, the relationship summary may reduce the costs associated with mismatch for investors, firms, and financial professionals and increase the efficiency of the market for financial advice. We expect these efficiency gains particularly in the initial matching between investors and firms and financial professionals. For some retail investors, receipt of the relationship summary from their existing firm or financial professional could highlight that they are mismatched in their current relationship. Those investors may benefit from terminating the mismatched relationship and looking for a more appropriate match, but such gains are likely to only be realized to the extent investors anticipate the long-term benefits from a better match will be greater that the short-run switching and search costs. Moreover, these efficiency benefits may be attenuated to the extent that investors tend to stay in relationships with financial professionals once investors are committed to the relationship, even if the relationship is mismatched. Informational efficiencies could also be enhanced with the relationship summary because key information is focused on information that has been previously identified as important to retail investors, salient and consistently disclosed across broker-dealers and investment advisers. The relationship summary will provide concise, userfriendly information which will allow retail investors to better understand the relationship that they will have with their financial professionals and will allow them to seek services commensurate with their expectations. In addition, to the extent the information asymmetry between investors and financial professionals is reduced, investors may make more informed investment decisions, or become more able to critically evaluate any investment advice they receive. Further, the use of layered disclosure and conversation starters will allow retail investors to access additional information that may be relevant to them when selecting their firm or financial professional, further reducing the risk of mismatch. The firm-specific nature of the relationship summary required by the 1162 However, as discussed previously in, e.g., supra Section IV.B, a mismatch from the retail investors’ perspective may be advantageous for firms in certain circumstances, in which case firms may not overall benefit from a decrease in the number of mismatched investors. PO 00000 Frm 00280 Fmt 4701 Sfmt 4700 final rules about a particular firm will enhance retail investors’ information set about each firm, providing them with a more concise and simple document, which should alleviate potential investor confusion about the key elements of the relationship that the investor could expect to have with that firm. However, such improved efficiency could be lower than that expected under the proposal because, unlike the proposed relationship summary, the adopted relationship summary will include less prescribed language and greater flexibility. For example, the relationship summary will not include a comparison between general brokerdealer and investment adviser standards and services.1163 The elimination of this proposed requirement will likely reduce (relative to the proposal) the usefulness to retail investors from obtaining this general information from a single source (e.g., any firm’s relationship summary) and instead will require effort from investors in the form of search costs to provide an adequate comparison across firms within a given type of firm (e.g., investment advisers). Moreover, for investors that may not know which type of firm is likely to best meet their preferences and expectations with respect to financial services, a less general relationship summary requires that investors that expend search costs also select the correct types of firms in order to make such a comparison. This may be difficult for some retail investors, and could increase the costs of search and the risk of mismatch. Also, allowing dual registrants the flexibility to prepare two separate relationship summaries rather than one combined document may result in some efficiency loss in terms of less direct comparability. Nonetheless, we believe that investors having access to specific and tailored information about the firms, as provided in the final rules, is more important for reducing investors search costs and risk of mismatch, thereby justifying the potential efficiency losses (relative to the proposal) discussed above. Beyond informational efficiencies that could arise, the relationship summary also may lead to more efficient investor allocation of assets within their portfolios relative to the baseline. Some retail investors that previously avoided the market for financial services because they did not understand the material characteristics of either broker-dealers or investment advisers may be more 1163 See supra Section II.B.6 for why the generalized comparison discussion was not included in the relationship summary. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 likely to hire a financial professional if the costs associated with the acquisition of this information are reduced relative to the baseline. The relationship summary is a simple, concise document providing investors information about key elements of the investor-provider relationship that could incent some investors to seek the services of a financial professional. As such, for some investors that previously abstained from hiring a financial professional, portfolio efficiency could be improved, for example, through increased portfolio diversification.1164 Furthermore, because of being provided the relationship summary, some current investors may realize that other services provided by their financial professional could be more appropriate for them. For example, an advisory client of a dual registrant may learn more about the broker-dealer services offered by the firm and realize that those services better match his or her preferences and make a switch, which may ultimately improve portfolio efficiency for the client. However, as noted in Regulation Best Interest, certain studies suggest that for some financial professionals, the improvements to portfolio efficiency could be limited if the financial professionals are subject to the same behavioral biases, such as limited attention or anchoring, as retail investors in their portfolio allocation decisions.1165 Further, to the extent the relationship summary makes the conflicts of interest of financial professionals more salient to retail investors relative to the baseline, there is a risk that some professionals would feel they have a ‘‘moral license’’ to act on their conflicts,1166 which could harm the efficiency of retail investors’ portfolio allocations. Despite such potential negative effects related to conflicts of interest disclosure, we believe that, on balance, retail investors will benefit from the inclusion of this disclosure in the relationship summary. In particular, the conflicts of interest disclosure should enhance investors’ ability to evaluate which relationship is best for them and also help them more critically evaluate the recommendations or investment advice they receive, which should ultimately improve the efficiency of their portfolio allocations. 1164 As discussed above, academic studies have identified several potential benefits to retail investors from seeking investment advice, including increased diversification; see supra footnote 1005 and accompanying text. 1165 See Regulation Best Interest, Section III.B.3.b. 1166 See supra footnote 1027 and accompanying text. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 In addition, and in a modification from the Proposing Release, the headings on the relationship summary will be machine readable, which will facilitate third-party data aggregators’, as well as the Commission’s, analysis and comparison of certain elements of the relationship summary across firms to the benefit of retail investors. Comparability will lead to greater informational efficiency because retail investors will be better able to choose the right type of firm or financial professional and the right type of account and services, thereby increasing the likelihood that they choose what best meets their needs and reduces the likelihood of mismatch. Providers may likewise benefit from higher information acquisition efficiency because firms may be more likely to initially attract retail investors who prefer their services, thereby potentially reducing customer acquisition costs, such as time and effort spent on initial engagement with prospective customers who ultimately do not contract for their services. b. Competition Beyond increased efficiency for retail investors, the relationship summary may also increase competition among broker-dealers and investment advisers. Provision of the relationship summary by firms could enhance the competitiveness of broker-dealers and investment advisers by allowing retail investors to better evaluate and compare firms and financial professionals through increased transparency, and more generally increase retail investors’ understanding of the market for brokerage and investment advisory services. In particular, increased transparency may allow investors to better assess the types of services available and the types of fees and costs associated with such services. Moreover, and as discussed above, the relationship summary may facilitate comparisons across firms and lead to reduced search costs for retail investors, allowing investors to match their preferences and expectations for certain financial services, possibly at lower costs relative to the baseline, and may increase competitiveness between firms to lower prices for some services. We believe the changes made to the relationship summary in the final rules have potentially strengthened such competitive effects, for example, by using less prescribed general language and instead requiring disclosure of firmspecific information about services, fees, costs, and conflicts, and by making the headings machine readable, which may encourage the development of search tools by third party providers. An PO 00000 Frm 00281 Fmt 4701 Sfmt 4700 33597 increase in competition may apply only between like firms (i.e., broker-dealers only or investment advisers only) or may have intra-industry effects across broker-dealers and investment advisers. As discussed above, increased competition both among and between broker-dealers and investment advisers could reduce the pricing power of firms, benefitting investors through lower fees. Lower fees could draw more retail investors that are not currently seeking investment advice to the market, although some retail investors may be willing to pay higher prices for other reasons, including enhanced services and firm reputation. Combined with improved informational efficiency, increased competition for retail investors resulting from information provided by the relationship summary may drive prices at the margin to competitive levels across all types of firms, depending on how price sensitive retail investors are. Alternatively, and similar to what we have today, a separating equilibrium may result where investors’ demand for particular services is relatively price insensitive and they cannot be persuaded to move to a different level of service simply because of lower prices (e.g., investors seeking ongoing advice may be more likely to pay higher prices for advisory services provided by investment advisers, even though a potentially lower cost option could be available through broker-dealers). Further, lower costs of information acquisition and processing due to the content, format, and structure of the relationship summary may lead to more people entering the market for brokerage and investment advisory services and may increase overall retail investor participation. Such an increase in the number of retail investors in the market for financial services could raise demand for brokerage and investments advisory services and mitigate the potential increase in competition discussed above. However, increased levels of retail investor participation could also encourage new broker-dealer and investment adviser entrants to meet the needs of the new pool of investors, and may increase competition for investor capital through lower fees and costs. How the competitive landscape will shift as a result of the relationship summary is difficult to determine and the effect on aggregate level of competition among and between brokerdealers and investment advisers could be limited. For example, the relationship summary may not necessarily increase the number of new broker-dealer or investment adviser E:\FR\FM\12JYR2.SGM 12JYR2 jbell on DSK3GLQ082PROD with RULES2 33598 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations entrants to the market, but could lead to shifts of investors between brokerdealers and investment advisers to the extent that some currently engaged retail investors are mismatched, and that search and switching costs associated with correcting the mismatch do not justify the costs associated with the potential mismatch. Moreover, the incidence of mismatched relationships with retail investors could be likely for both broker-dealers and investment advisers, so competition could be relatively unaffected in the aggregate; therefore, any mismatch corrected as a result of the relationship summary may not result in a significant net loss of investors for either broker-dealers or investment advisers. In addition, to the extent currently mismatched investors are customers of dual registrants, any switch in account type (brokerage or investment advisory), as a result of the relationship summary, may take place within a dual registrant rather than between different firms, further attenuating any competitive impact. By reporting legal or disciplinary history, the relationship summary may provide benefits to retail investors by prompting them to seek out additional information (e.g., from Investor.gov or BrokerCheck) on their current or prospective firms and financial professionals and take that information into account when considering whom to engage for financial services. Competition between firms may be enhanced if firms and financial professionals with better disciplinary records drive out those with worse records. We note, however, that legal and disciplinary history reported in the relationship summary may bias firms towards hiring financial professionals with fewer years of experience (i.e., fewer opportunities for customer complaints) and against hiring experienced financial professional with some (minor) complaints. Further, investors may also bias their choice of firm or financial professional in the same manner. One commenter stated that reporting of legal and disciplinary history ‘‘imposes an inappropriate competitive imbalance and inaccurate picture concerning the relative number of disciplinary actions in sales organizations with large number of financial professionals.’’ 1167 The expected economic impact of disciplinary reporting on competition across large and small firms, however, is generally unclear because small firms may suffer disproportional reputational penalties from more salient disciplinary history disclosure. In general, reportable 1167 See ACLI Letter. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 disciplinary history is less common for smaller firms than for larger firms.1168 Thus, small firms may appear to have better disciplinary history reputation than large firms solely because of their size of operations, rather than their actual legal and regulatory compliance or the professional ethics or integrity of their employees. At the same time, investors may over-react to generally more frequent disciplinary history disclosure by larger firms and forego potentially well-matched relationship with the larger firms as a result. Disclosing reportable legal and disciplinary history in the relationship summary may confer a small competitive advantage for investment advisers over broker-dealers because broker-dealers are more likely to have to report that they have a disciplinary history due to broader broker-dealer disclosure obligations. Reporting from Form BD with respect to broker-dealer disclosures of disciplinary actions taken by any regulatory agency or SRO show than 308 (86%) out of 318 retail-facing dual-registered broker-dealers disclosed a disciplinary action. In contrast, 1,330 (54%) out of 2,448 retail-facing standalone broker-dealers disclosed a disciplinary action. For investment advisers, Form ADV requires disclosure of any disciplinary actions taken in the past 10 years, and 284 (79%) of 318 retail-facing dual-registered investment advisers disclosed a disciplinary action. However, for standalone investment advisers, only 1,176 (15%) of 7,917 retail-facing investment advisers disclosed a disciplinary action.1169 As broker-dealers have relatively more reportable legal and disciplinary history than investment advisers, retail investors may engage investment advisers with greater frequency than 1168 For example, while only 36% of registered investment advisers with less than $1 million of AUM disclose at least one disciplinary action as of January 1, 2019, 71% of registered investment advisers with more than $50 billion of AUM disclosed at least one disciplinary action that year. Form ADV. Similarly, while 42% of broker-dealers with less than $1 million in total assets disclose at least one disciplinary action as of January 1, 2019, 100% of broker-dealers with more than $50 billion total assets disclosed at least one disciplinary action that year. Form BD. 1169 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) have imposed upon it 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. PO 00000 Frm 00282 Fmt 4701 Sfmt 4700 broker-dealers as a result of the disciplinary history reporting on the relationship summary, potentially creating a competitive advantage for some investment advisers. Although the 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 rule changes such as investment advisers not registered with the SEC (e.g., state registered investment advisers), bank trust departments, insurance companies, and others. In particular, the relationship summary could change the size of the brokerdealer 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, this could attract new retail investors to the brokerdealer and investment adviser markets from firms in other markets. At the same time, it is possible that, as a result of conflicts of interest and the existence of disciplinary history being saliently disclosed in the relationship summary, some investors may be deterred from seeking services of registered investment advisers or broker-dealers and instead seek the services provided by a state registered advisor or another professional not regulated by the Commission, or forego seeking financial services altogether. 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 types of fees and costs of investment advisory and brokerage services more prominent. Such a switch could be within the market for investment advisory and brokerage services, or to a financial services provider outside this market (such as a bank or insurance company). The information disclosed in the relationship summary may also lead some investors to realize a relationship with any financial services provider may not be in their best interest, and therefore withdraw altogether from the market. The exact extent and direction of substitution among different types of providers’ 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, and the extent to which investors will digest and use the provided information in firms’ relationship summaries. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 To the extent the relationship summary increases competition between broker-dealers and investment advisers, and between these firms and other financial services providers, it may result in development of new products and services, and general innovation by the industry at large. Competition among firms could provide incentives for firms to seek alternative ways to attract retail investors and generate profits. In the process, firms could develop new and better ways of providing services to retail investors, for example, by utilizing information technology to deliver information to retail investors at lower costs. In this way, innovation could improve retail investors’ welfare as well as the profitability of financial service providers. 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 disclosure about indirect fees associated with investments that compensate the brokerdealer, including mutual fund loads. Currently, selling concessions constitute a significant part of the compensation of broker-dealers selling mutual fund products.1170 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. To the extent the relationship summary increases the transparency and salience of such selling concessions and related conflicts of interest, investors may start to avoid investing in products that provide selling concessions, encouraging broker-dealers to avoid such arrangements. To compensate for the potential loss of concession-based revenue, dually registered firms could try to switch customers from their brokerage account to their advisory accounts. As noted above, however, if the relationship summary also increases the competitiveness in the broker-dealer and investment adviser markets, the increased competitiveness would create some general downward price pressure in the market which may spillover to selling concessions. c. Capital Formation As discussed above, the relationship summary may improve retail investors’ understanding about, and confidence in, the market for brokerage and investment advisory services, which may increase participation in this market by investors 1170 See supra Table 2, Section IV.B.1.a. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 that previously avoided it. Such additional entry by new investors could increase the level of total capital across markets and increase the demand for new investment products and securities, which could precipitate capital formation in aggregate across the economy. Depending on the magnitude of these effects, the increased availability of funds could result in lower cost of capital for companies, which could facilitate economic growth. However, to the extent the disclosure of certain information such as conflicts of interest or disciplinary history decreases some retail investors’ level of confidence in market for brokerage and investment advisory services, or the information provided makes some investors believe that they do not benefit from a relationship with a firm or financial professional, such investors could exit this market, which could attenuate any effects on capital formation. In addition, to the extent that the market for financial services is already saturated, there may only be a redistribution between broker-dealers, investment advisers, and other financial service providers (such as stateregistered investment advisers, banks, and insurance companies) as a result of retail investors becoming more informed, and any effects on capital formation would be attenuated. 4. Alternatives to the Relationship Summary To reduce retail investor search costs and costs of potential mismatch between retail investors and professionals in brokerage and investment advisory services, we considered various alternative approaches to the relationship summary, including whether to adopt additional disclosure requirements. We have previously learned through public comments, investor testing, and a staff financial literacy study that industry commenters and survey participants generally supported a short disclosure document to retail investors that would address firms’ nature and scope of services, fees, and material conflicts of interest.1171 Accordingly, we proposed rules and rule amendments to require firms to provide retail investors with disclosures designed for those purposes. In our proposal, we solicited comment on alternatives to various elements of the relationship summary. As discussed in Section I above, we also conducted extensive public outreach, including investor roundtables, specific solicitation of investor comments 1171 See Proposing Release, supra footnote 5, at nn.13–21 and accompanying text. PO 00000 Frm 00283 Fmt 4701 Sfmt 4700 33599 through the Feedback Forms, and investor testing.1172 We considered the suggestions and recommendations received through these processes as alternative approaches in our rulemaking, many of which we discussed in greater detail in Sections I and II above. In determining the required scope and level of detail of information in the relationship summary, we balanced the need for robust disclosures with the risk of investor information overload and failure to properly process these disclosures, a recurring theme in both comment letters and investor feedback received through surveys and studies, roundtables and on Feedback Forms. a. Amending Existing Disclosures The relationship summary will be a new, separate disclosure, in addition to other disclosures that firms already must provide.1173 As noted in Section I above, some commenters argued that the relationship summary is duplicative of other disclosures, for example in Form ADV or in Form BD, and is thus unnecessary.1174 The Commission considered amending Part 2A of Form ADV to require a brief summary at the beginning of the brochure in addition to the existing narrative elements, or changing certain existing Part 2A requirements to reduce or eliminate redundancy with parts of the relationship summary. Similarly, the Commission considered whether to amend and require delivery to retail investors of a revised Form BD to include the same information as in the relationship summary, and make that information publicly available.1175 After careful consideration and for the reasons discussed in Section I above, we believe that a separate summary disclosure will be more effective to help retail investors to choose from among firms and investment services than modifying existing disclosures.1176 We believe that a short, standalone relationship summary that facilitates comparisons across different providers 1172 See supra footnotes 11–21 and accompanying text. 1173 Broker-dealers and investment advisers have disclosure and reporting obligations under state and federal laws, including, but not limited to, obligations under the Exchange Act, the Advisers Act, and the respective rules thereunder. Brokerdealers are also subject to disclosure obligations under the rules of SROs. 1174 See supra footnote 33 and accompanying text. 1175 For example, the instructions to Form BD contain a section on the explanation of terms which could be extended to include basic (registrantspecific) information on the business practices of the registrant. 1176 See supra footnotes 42–44 and accompanying text. E:\FR\FM\12JYR2.SGM 12JYR2 33600 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 and types of services is necessary to highlight information that is relevant to a retail investor before or at the time she is deciding to select a firm, financial professional, account type, or services. To that end, the short and succinct relationship summary includes topics that retail investors indicated would be important to them in selecting a provider. Specifically, because the relationship summary is a shorter document and designed to be more of an overview than the existing investorfacing disclosures, such as Form ADV, and is specifically targeted to help retail investors obtain certain information before deciding to enter into a relationship with a financial professional, retail investors facing that decision can process its information content more efficiently. The relationship summary facilitates layered disclosures and highlights where investors can access more detailed information, including existing documents that investors receive, which could facilitate review of those documents, such as Form ADV Part 2. The relationship summary also promotes the investor receiving more detailed information about the provider and its services, as necessary, through conversation starters. Furthermore, when compared to other disclosures that financial professionals may make on, for example, Form ADV and Form BD, the relationship summary seeks to enhance comparability across both adviser and broker-dealer provider types for retail investors. Thus, despite some content duplication with other existing disclosure requirements and firms having to bear the cost of creating additional disclosures, we believe that retail investors will benefit from having information relevant to deciding on a firm, financial professional, and/or accounts and services in one place in a more succinct, salient and standardized fashion. Overall, we believe that the relationship summary will enable better-informed decision-making, reduce risk of mismatch, and reduced search costs by retail investors. b. Form and Format of the Relationship Summary Under the final instructions, firms will be required to describe, largely in their own wording, different topics related to their offerings in a questionand-answer format. In comparison, we proposed instructions providing for standardized, declarative headings for each section of the relationship summary and a mix of prescribed and firm-specific language within each section. As discussed in Section I above, VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 nearly all commenters and investors providing feedback at roundtables and on Feedback Forms suggested modifications to the sample relationship summary and proposed instructions, and numerous commenters submitted alternative sample relationship summaries.1177 Delivery of SEC-authored form. Commenters suggested that the SEC author a standard industry-wide disclosure to deliver to retail investors, which could then be supplemented by firm-specific documents.1178 For example, one commenter suggested using as a potential framework the Buyers Guides developed by the National Association of Insurance Commissioners that insurance companies must deliver under certain circumstances.1179 Commenters supporting an SEC-authored educational layer believed that the SEC was better placed than firms to discuss areas viewed to be educational in nature, such as comparisons, standard of conduct, and key questions to ask. We have incorporated an element of these commenters’ suggestion by removing the comparisons section, which many commenters viewed as educational, and adding a link at the beginning of the relationship summary to Investor.gov/CRS where investors can obtain educational materials. However, we believe that investors are better served by keeping certain disclosures that may be viewed as more educational in nature, such as the standard of conduct and some of the ‘‘conversation starters’’ (replacing the ‘‘Key Questions to Ask’’), in the relationship summary. We believe investors are more likely to understand how such content will affect them when presented in the context of the particular firm. Level of Flexibility in the Disclosure As discussed in more detail above, we considered the appropriate level of prescribed wording and topics in the disclosure. Several commenters suggested that, as an alternative to the prescriptive wording in the proposed relationship summary, we provide firms with more flexibility to craft their responses to items, with or without an SEC standardized disclosure to accompany the relationship summary or available on Investor.gov. We considered the relative merits of prescribed wording and formatting versus allowing firms to use their own, as well as a mix of prescribed 1177 See supra footnotes 36–40 and accompanying text. PO 00000 1178 Primerica 1179 ACLI Letter. Letter. Frm 00284 Fmt 4701 Sfmt 4700 requirements and discretionary choices. We considered this for different topics and sub-topics in the relationship summary, as well as for the relationship summary overall. In some instances, we determined that prescribed wording would provide targeted benefits that discretionary wording could not, for example, through the use of standardized headings and a prescribed order of topics in order to maintain the benefits of comparability and utility for retail investors.1180 For the reasons discussed in Section II, above, we also determined to prescribe wording for conversation starters, the standard of conduct, and a factual statement regarding the effect of fees over time. In the event that prescribed wording is inapplicable to a firm’s business or inaccurate, the firm may omit or modify that wording. We believe that this approach will allow firms greater flexibility to tailor their relationship summary disclosures to reflect their offerings more closely and accurately. However, greater flexibility in terms of wording could also allow firms to present disclosures in a more advantageous manner to them, rather than in a manner that would maximize the benefits to investors from the disclosures. Nonetheless, we believe retail investors will benefit under this adopted approach by receiving disclosures that may be more understandable, and also more informative about a particular firms’ offerings that they are considering. c. Summary of Fees, Costs, Conflicts, and Standard of Conduct In response to comments and investor feedback through surveys and studies, roundtable and the Feedback Forms, we are adopting changes from the proposal to the relationship summary’s required discussion of fees, costs, conflicts of interest, and standard of conduct, as described above.1181 In connection with fee disclosure, the Commission considered many alternative approaches relating to the scope and types of fees firms must include in their relationship summaries, as well as the presentation of the fee disclosure.1182 As discussed in Section II.A.4 above, commenters’ views varied on the scope and types of fees that should be disclosed and their level of 1180 See supra Section II.A.1. supra Section II.B.3. 1182 See supra Section II.A.4. In addition, the Commission considered alternative approaches with respect to the disclosure regarding a firm’s conflicts of interest and standard of conduct. A discussion of the Commission’s consideration may be found in Section II.A.4. 1181 See E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 detail.1183 In addition to what we had proposed and what we have adopted, the Commission considered other alternatives, such as whether to require firms to list all fees that retail investors may incur, to allow firms the flexibility to determine what fees to highlight, and variations or combinations of these approaches. The final approach is designed to balance the need to provide a comprehensive view of what fees retail investors will pay with the need to produce relevant, succinct and understandable disclosures. The final instructions do not require firms to disclose every single fee and instead permit firms to highlight examples of the categories of the most common fees that their retail investors will pay directly or indirectly.1184 We believe this approach benefits retail investors because they will be able to compare fee information that is more closely tailored to firms’ particular business practices, but also reflective of common fees that retail investors are likely to incur. The Commission also considered alternative ways in which firms should present their fees, such as whether to require firms to link to or include a fee schedule directly in the relationship summary,1185 or to require firms to include a hypothetical fee example.1186 Under the final instructions, firms must summarize their principal fees and costs and other fees and also include specific cross-references to more detailed information about their fees available in other sources.1187 The Proposing Release discussed the option of including an example of the impact of fees in the relationship summary.1188 While some commenters supported the inclusion of various forms of additional examples of fees calculations,1189 after careful consideration of the comment file and investor feedback received through studies and surveys, roundtables and Feedback Forms, we are declining to include a hypothetical fee example in the relationship summary. We do so in light of commenters who suggested that such an example could be operationally difficult to implement, and that it could be perceived as confusing.1190 Specifically, 1183 See supra footnotes 420–423 and accompanying text. 1184 See Item 3.A. of Form CRS. 1185 See supra footnotes 426–435 and accompanying text. 1186 See supra footnotes 438–435 and accompanying text. 1187 See Item 3.A.(ii) of Form CRS. 1188 Proposing Release, supra footnote 5. 1189 See, e.g., Wahl Letter; AARP Letter; Betterment Letter I. 1190 NSCP Letter; Edward Jones Letter (noting that given the range of services available, it would be VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 we believe the assumptions required to make a fee example relevant for investors vary for individual investors to the extent that a standardized example risks increasing investor confusion. Instead, to help stimulate this discussion, a firm must include in the relationship summary the following conversation starter: ‘‘Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?’’ 1191 As discussed above,1192 this represents a different wording from the corresponding ‘‘Do the Math for Me’’ Key Question in the proposal, but we expect it to similarly encourage the retail investor to ask about the amount they would typically pay per year for the account and what is included in those fees, while being easier and less costly to answer for firms at the outset of the relationship. d. Filing and Delivery In connection with filing and delivery, Commission considered alternatives relating to filing formats, filing systems, and timeframes for firms’ initial relationship summary and subsequent updates. As discussed in Section II.C. above, firms will file copies of their relationship summaries with the Commission. The proposed instructions provided that firms must file their relationship summaries in a textsearchable format but did not specify one. We solicited comment on whether the relationship summary should be filed as a text-searchable PDF, similar to how Form ADV is currently filed, or other enumerated formats. We also asked about what type of format would facilitate greater comparability across forms. Two commenters advocated that the relationship summary should be filed not only in a text-searchable, but also machine-readable format, in order to facilitate development of data aggregation tools allowing for comparability of forms across providers.1193 The Commission believes very difficult for financial professionals to fully address this question at the outset of the relationship, particularly for investors selecting transaction-based services); TIAA Letter; LPL Financial Letter; Primerica Letter; ICI Letter; SIFMA Letter (noting most firms do not currently have systems in place to allow financial professionals to answer customer-specific questions). 1191 Item 3.A.(iv) of Form CRS. 1192 See supra Sections II.A.4 and II.B.3.a. 1193 CFA Letter I (‘‘past experience regarding investors’ limited use of existing databases, such as IARD and BrokerCheck, cautions against placing too much reliance on investors’ accessing the documents directly. We therefore urge the Commission to require that the documents be filed, not just in a text-searchable format, but in a PO 00000 Frm 00285 Fmt 4701 Sfmt 4700 33601 that although a PDF submission format would not be the most ideal for comparing or aggregating data across relationship summary filings, it would likely be the easiest and least costly. A fillable form allowing the firm to enter text, similar to Form ADV Part 1, also would not be costly, but would not easily accept formatted tables or other graphical information. The final instructions, as with the proposed instructions, do not specify a particular format, but the current filing systems default firms to PDF format. In a change from the proposal, we are requiring firms to implement machine-readable headings for their filings. We agree with the commenters that suggested this change that this approach facilitates some degree of data aggregation, while imposing limited costs on registrants. Furthermore, we requested comments on alternative filing systems for the relationship summary. In response to comment and upon further consideration, as discussed in Section II.C.2 above,1194 we are requiring broker-dealers to file their relationship summaries through Web CRD®, instead of EDGAR, as proposed. As discussed in Section II.C.3.a above, we also considered whether to allow more permissive use of electronic delivery. As proposed, we are affirming that the relationship summary must be delivered in accordance with the Commission’s electronic delivery guidance. We are adopting an additional instruction, however, that a firm may 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, and that this method of initial delivery for the relationship summary would be consistent with the Commission’s electronic delivery guidance.1195 Commenters suggested different approaches to electronic delivery, such as the ‘‘notice plus access’’ model, and a more comprehensive updating of the Commission’s electronic delivery guidance, which we considered as alternative approaches in this rulemaking. While we recognize the machine-readable format.’’); Schnase Letter (‘‘the data contained in the Relationship Summary should be required to be filed in a structured data format, so the document can be utilized as a stand-alone human-readable document and serve as the source for a machine-readable data set’’). 1194 See supra footnotes 666–669 and accompanying text. 1195 See Proposing Release, supra footnote 5, at nn.344–45 and accompanying text; see also 2000 Guidance, supra footnote 678, at 65 FR 25845–46; 96 Guidance, supra footnote 678, at 61 FR 24647; and 95 Guidance, supra footnote 678, at 60 FR 53461. E:\FR\FM\12JYR2.SGM 12JYR2 33602 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations potential cost savings to firms of allowing greater use of electronic delivery, we place great importance on how investors prefer to receive information. Some commenters said that investors prefer to receive electronic disclosures because they are delivered faster and can be in more engaging formats, including video and audio. On the other hand, investor surveys and investor testing show that some investors still prefer to receive paper disclosures, including in a hybrid approach of electronic disclosure with the option for paper.1196 As discussed in greater detail in Section II.C.3.a, the adopted approach of encouraging electronic presentations that are engaging to retail investors, while preserving the option for paper, within the framework of the Commission’s electronic delivery guidance and in accordance with retail investors’ preferences, is appropriate for the relationship summary. jbell on DSK3GLQ082PROD with RULES2 e. Transition Provisions As discussed above, we are adopting an initial date of June 30, 2020 for all firms that are registered, or investment advisers who have an application for registration pending with, the Commission prior to June 30, 2020, to file their initial relationship summaries with the Commission. We considered tiered compliance dates for firms of different sizes. We believe that the compliance dates, as adopted, balance the time and resources needed by different firms, as well as the assets under management and the number of firms that would be covered within the different compliance periods. V. Paperwork Reduction Act Analysis The amendments that we are adopting here contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).1197 In the Proposing Release, we solicited comment on the proposed collection of information requirements. We also submitted the proposed collection 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 collections of information we are amending 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 1196 See supra footnotes 682–689 and accompanying text. 1197 44 U.S.C. 3501 et seq. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 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 we are adopting 1198 relate to (i) ‘‘Rule 204–5 under the Investment Advisers Act of 1940’’ (OMB control number 3235–0767); and (ii) ‘‘Form CRS and rule 17a–14 under the Exchange Act’’ (OMB control number 3235–0766). We are also amending 17 CFR 200.800 to display the control number assigned to information collection requirements for ‘‘Form CRS and rule 17a–14 under the Exchange Act’’ by OMB pursuant to the PRA. 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 OMB number. 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 2A is the client brochure. 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 1198 The Commission is not adopting two other rules in the Proposing Release that would have contained collections of information. Proposed rule 211h–1 under the Advisers Act and proposed rule 15l–3 under the Exchange Act relate to the disclosure of Commission registration status and financial professional association. As discussed in Section I above, we have concluded that the combination of the disclosure requirements in Form CRS and Regulation Best Interest should adequately address the objectives of the proposed Affirmative Disclosures. PO 00000 Frm 00286 Fmt 4701 Sfmt 4700 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 adopting amendments to Form ADV to add a new Part 3, requiring registered investment advisers that offer services to retail investors to prepare and file with the Commission, post to the adviser’s website (if it has one), and deliver to retail investors a relationship summary, as discussed in greater detail in Section II above. Advisers will deliver the relationship summary to both existing clients and new or prospective clients who are 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 relationships and services the firm offers to retail investors, fees and costs that the retail investor will pay, specific conflicts of interest and standards of conduct, legal or disciplinary history, and how to obtain additional information about the firm. The amendment requiring investment advisers to deliver the relationship summary is contained in a new collection of information under new rule 204–5 under the Advisers Act, for which estimates are discussed below. We did not propose amendments to Part 1 or 2 of Form ADV.1199 As discussed in Sections I and II of this release, we received comments that addressed whether the relationship summary is duplicative of other disclosures and necessary for investment advisers, and whether we could further minimize the burden of the proposed collections of information. One commenter specifically addressed the accuracy of our burden estimates for the proposed collection of information, suggesting that our estimates were too low because compliance professionals estimated it would take 80–500 hours to 1199 We are adopting 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 amended General Instructions to Form ADV. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations prepare, deliver, and file the relationship summary, depending on the firm’s size and business model.1200 Another commenter said the current Form ADV requirements are a burden to smaller firms and that the currently approved burdens of 23.77 hours and $6,051 are too low.1201 Others commented more broadly that certain costs to prepare and file the relationship summary would be higher than we estimated in the proposal.1202 We have considered these comments and are increasing our PRA burden estimates from 5 hours to 20 hours for investment advisers to prepare and file the relationship summary. We also modified several substantive requirements to mitigate some of these estimated increased costs relative to the proposal. 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 exempt reporting advisers.1203 Based on the IARD system data as of December 31, 2018, approximately 13,299 investment advisers were registered with the Commission, and 4,280 exempt reporting advisers file reports with the Commission. As discussed above, we are adopting amendments to Form ADV that will add a new Part 3, requiring certain registered investment advisers to prepare and file a short and accessible relationship summary for retail investors. Based on IARD system data as of December 31, 2018, the Commission estimates that 8,235 investment advisers have some portion of their business dedicated to retail investors, including either individual high net worth clients or individual non-high net worth clients,1204 which is higher relative to 1200 See NSCP Letter. Marotta Letter. 1202 See, e.g., MarketCounsel Letter. Others argued that the cost of Form CRS and Regulation Best Interest would be high. See, e.g., Raymond James Letter; CCMC Letter (investor polling results); SIFMA Letter. 1203 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. 1204 Proposing Release, supra footnote 5, at Section V.A.1. Based on responses to Item 5.D. of Form ADV, these advisers indicated that they advise either high net worth individuals or jbell on DSK3GLQ082PROD with RULES2 1201 See VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 the estimate in the Proposing Release.1205 This will leave 5,064 registered investment advisers that do not provide advice to retail investors 1206 and 4,280 exempt reporting advisers that will 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.1207 We also note that these figures include the burdens for 318 registered broker-dealers that are dually registered as investment advisers as of December 31, 2018.1208 We did not receive comments related to the methodology used for estimating the number of investment advisers that will be subject to Form ADV Part 3 requirements. We are maintaining the methodology we used in the Proposing Release and are updating our estimates to reflect the increased number of investment advisers and exempt reporting advisers since the last burden estimate. 2. Changes in Average Burden Estimates and New Burden Estimates Based on the prior revision of Form ADV,1209 the currently approved total aggregate annual hour burden estimate for all advisers of completing, amending, and filing Form ADV (Part 1 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 in Item 5.D.(a)(1) of Form ADV or have regulatory assets attributable to either high net worth individuals or individuals other than high net worth individuals in Item 5.D.(a)(3) of Form ADV. The definition of retail investor will include the legal representatives of natural persons who seek to receive or receive services primarily for personal, family, or household purposes. As discussed in Section II.C.1 above, a legal representative of a natural person will cover only non-professional legal representatives (e.g., a nonprofessional trustee that represents the assets of a natural person and similar representatives such as executors, conservators, and persons holding a power of attorney for a natural person). We are not able to determine, based on responses to Form ADV, exactly how many advisers provide investment advice to these types of legal representatives or trustees; however, we believe that these advisers most likely also advise individuals and are therefore included in our estimate. 1205 We estimated in the Proposing Release that approximately 7,625 registered investment advisers of the 12,721 registered investment advisers would be subject to the relationship summary requirements, based on IARD system data as of December 31, 2017. See Proposing Release, supra footnote 5 at Section V.A. 1206 13,299 registered investment advisers—8,235 = 5,064 registered investment advisers not providing advice to retail investors. 1207 Based on IARD system data. 1208 See supra footnote 863. 1209 See Form ADV and Investment Advisers Act Rules, Final Rule, Investment Advisers Act Release No. 4509 (Aug. 25, 2016) [81 FR 60418 (Sept. 1, 2016)] (‘‘2016 Form ADV Paperwork Reduction Analysis’’). PO 00000 Frm 00287 Fmt 4701 Sfmt 4700 33603 and Part 2) with the Commission is 363,082 hours, or a blended average of 23.77 hours per adviser,1210 with a monetized total of $92,404,369, or $6,051 per adviser.1211 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 SECregistered 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.1212 The amendments will increase the current burden estimate due in part to the 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 did not propose amendments to Part 1 or Part 2 of Form ADV. The amendments to Form ADV to add Part 3 will increase the information collection burden for registered investment advisers with retail investors. As discussed above in Sections I and II of this release, registered investment advisers providing services to retail investors will be required to prepare and file a relationship summary with the Commission electronically through IARD in the same manner as they currently file Form ADV Parts 1 and 2. We are also requiring that all relationship summaries be filed in a text-searchable format with machinereadable headings. These investment advisers also will be required to amend and file an updated relationship summary within 30 days whenever any information becomes materially inaccurate. As noted above, not all investment advisers will 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 will remain the same, in particular, 29.22 hours per registered investment adviser without relationship summary obligations. Similarly, because exempt reporting advisers also will not have relationship 1210 363,082 hours/(12,024 registered advisers + 3,248 exempt reporting advisers) = 23.77 hours. 1211 $92,404,369 hours/(12,024 registered advisers + 3,248 exempt reporting advisers) = $6,051. 1212 See 2016 Form ADV Paperwork Reduction Analysis, supra footnote 1209, at 81 FR 60454. E:\FR\FM\12JYR2.SGM 12JYR2 33604 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations summary obligations, the annual hour burden for exempt reporting advisers to meet their Form ADV obligations will remain the same, at 3.60 hours per exempt reporting adviser. However, although we did not propose amendments to Form ADV Part 1 and Part 2, and the per adviser information collection burden will 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 will increase due to an increase in the number of registered investment advisers and exempt reporting advisers since the last information collection burden estimate. We discuss below the increase in burden for Form ADV overall attributable to the adopted amendments, i.e., new Form ADV Part 3: Form CRS, and the increase due to the updated number of respondents that will not be subject to the adopted amendments. jbell on DSK3GLQ082PROD with RULES2 a. Initial Preparation and Filing of Relationship Summary As discussed above in Section II, investment advisers will be required to prepare and file a relationship summary summarizing specific aspects of their investment advisory services that they offer to retail investors. Much of the required information overlaps with that required by Form ADV Part 2A 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 2A brochure on IARD, and we have considered this factor in determining our estimate of the additional burden to prepare and file the relationship summary. In the Proposing Release, we estimated that the initial first year burden for preparing and filing the relationship summary, for investment advisers that provide advice to retail investors, would be 5 hours per registered adviser.1213 Some commenters said that these estimated burdens were too low,1214 and one argued that the current burden estimates for Form ADV are too low.1215 One commenter specifically argued that preparing, delivering, and filing the relationship summary would take from 1213 See Proposing Release, supra footnote 5, at nn.356 –367 and accompanying text. 1214 See, e.g., NSCP Letter; see also CCMC Letter (costs to implement the proposal were underestimated and greater than 40% of firms surveyed anticipate having to spend a moderate or substantial amount to implement Regulation Best Interest and Form CRS); SIFMA Letter (stating that implementation costs of Regulation Best Interest and Form CRS would be significant). 1215 See Marotta Letter. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 80 to 500 hours, based on input from compliance professionals, and noted there would be additional costs that are hard to quantify, including human resources and information technology programming.1216 Commenters also said more broadly that the relationship summary would be burdensome for investment advisers 1217 and would result in additional compliance burdens including training.1218 We are revising our estimate of the time that it would take each adviser to prepare and file the relationship summary in the first year from 5 hours in the proposal to 20 hours in light of these comments and the changes we are making to the proposed relationship summary.1219 For example, as discussed in the Proposing Release, we estimated that it would take firms a shorter amount of time to prepare the relationship summary than to prepare more narrative disclosures due to the standardized nature and prescribed language of the relationship summary. As discussed above, the final instructions require less prescribed wording relative to the proposal and require firms to draft their own summaries for most of the sections. In addition and in a change from the proposal, we are now requiring that all relationship summaries be filed with machine-readable headings, as well as in a text-searchable format as proposed. We acknowledge that these changes will increase cost burdens because advisers will have to develop their own wording and design, as well as implement machine-readable headings, to comply with these requirements. The relationship summary will also require more layered disclosures relative to the proposal and will encourage the use of electronic formatting and graphical, text, online features to facilitate access to other disclosures that provide additional detail. Although much of the information that will be summarized in the relationship summary is contained in other disclosures that firms already provide, firms will bear the cost of preparing a new relationship summary and cross-referencing or hyperlinking to additional information. The higher estimated burden estimate also reflects our acknowledgement that it will take firms longer to draft certain disclosures than we estimated in the Proposing NSCP Letter. MarketCounsel Letter. 1218 See NSCP Letter (stating that a minimum of two hours of firm level training or two hours of training per independent registered representative will be required prior to implementation and delivery of the relationship summary). 1219 See infra footnote 1221. PO 00000 1216 See 1217 See Frm 00288 Fmt 4701 Sfmt 4700 Release, such as answers to ‘‘conversation starters’’ that advisers providing automated investment advisory without a particular individual with whom a retail investor can discuss these questions must include on their website. We believe these factors and the other changes we made to the proposal will increase the burden to prepare a relationship summary relative to the proposal. We are estimating the same hourly burden for investment advisers and investment advisers that are dually registered as broker-dealers because we are counting dually registered firms in the burden calculation for Form ADV and the Exchange Act rule that requires the relationship summary for brokerdealers.1220 We recognize that the burden for some advisers will exceed our estimate, and the burden for others will be less due to the nature of their business, but we do not believe that the range could be as high as some commenters suggested.1221 After consideration of comments and changes we made to the requirements relative to the proposal and in light of the current approved burden for Part 2 of Form ADV, which requires more disclosures than the relationship summary, we are increasing the estimated burden relative to the proposal to 20 hours in the first year.1222 We therefore estimate that the 1220 The burden estimates for dual registrants to prepare and file the relationship summary are accounted for in the burden estimates for Form ADV and under Exchange Act rule 17a–14. For example, a dual registrant that prepares an initial relationship summary that covers both its advisory business and broker-dealer business has an estimated burden of 60 hours amortized (20 hours to prepare and file relationship summary related to the advisory business + 40 hours to prepare and file relationship summary related to the broker-dealer business). 1221 See NSCP Letter (estimating that the time required to prepare, deliver and file the relationship summary would be anywhere from 80 to 500 hours). In estimating the cost for the initial preparation of Form ADV Part 2, we estimated that small, medium, and large advisers would require 15, 97.5, and 1989 hours respectively to prepare Form ADV Parts 1 and 2, for investment advisers overall, and the per adviser annual hour burden for meeting their Form ADV Parts 1 and 2 requirements is 36.24 hours. See Brochure Adopting Release, supra footnote 576, at 75 FR at 49257. In comparison, as discussed above, the relationship summary is limited to two pages in length for standalone investment advisers and four pages in length for dual registrants in paper format (or equivalent in electronic format). While we recognize that different firms may require different numbers of hours to prepare and file the relationship summary, we believe that a first year average of 20 hours for investment advisers with relationship summary obligations is an appropriate estimate for purposes of calculating an aggregate burden for the industry, for purposes of the PRA analysis, particularly given our experience with the burdens for Form ADV Parts 1 and 2. 1222 We believe that much of the information required in the relationship summary overlaps with E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 total burden of preparing and filing the relationship summary will be 164,700 hours.1223 As with the Commission’s prior Paperwork Reduction Act estimates for Form ADV, we believe that most of the paperwork burden will be incurred in advisers’ initial preparation and filing of the relationship summary, and that over time this burden will decrease substantially because the paperwork burden will be limited to updating information.1224 The estimated initial burden associated with preparing and filing the relationship summary will be amortized over the estimated period that advisers will use the relationship summary, i.e., over a three-year period.1225 The annual hour burden of preparing and filing the relationship summary will therefore be 54,900.1226 In addition, based on IARD system data, the Commission estimates that 1,227 new investment advisers will file Form ADV with us annually; of these, 656 will be required to prepare and file the relationship summary.1227 Therefore, the aggregate initial burden for newly registered advisers to prepare and file the relationship summary will be 13,120 1228 and, amortized over three years, 4,373 on an annual basis.1229 In sum, the annual hour burden for existing and newly registered investment advisers to prepare and file a relationship summary will be 59,273 hours,1230 or approximately 6.67 hours per adviser,1231 for an annual monetized that required by Form ADV Part 2 and therefore should be readily available to investment advisers because of their existing disclosure obligations. Accordingly, although these new requirements will cause an increase in the information collected, the increased burden should largely be attributable to data entry and not data collection. 1223 20.0 hours × 8,235 investment advisers = 164,700 total aggregate initial hours. 1224 We discuss the burden for advisers making annual updating amendments to Form ADV in Section V.A.2.c below. 1225 See 2016 Form ADV Paperwork Reduction Analysis, supra footnote 1209. Amortizing the 20 hour burden imposed by the relationship summary over a three-year period will result in an average annual burden of 6.67 hours per year for each of the 8,235 investment advisers with relationship summary obligations. 1226 20.0 hours × 8,235 investment advisers/3 = 54,900 total annual aggregate hours. 1227 The number of new investment advisers is calculated by looking at the number of new advisers in 2017 and 2018 and then determining the number each year that serviced retail investors. (644 for 2017 + 668 for 2018)/2 = 656. 1228 656 new RIAs required to prepare relationship summary × 20.0 hours = 13,120 hours for new RIAs to prepare relationship summary. 1229 656 × 20.0 hours/3 = 4,373. 1230 (164,700 + 13,120)/3 years = 59,273 annual hour burden for existing and new advisers to prepare and file relationship summary. 1231 59,273 hours/(8,235 existing advisers + 656 new advisers) = 6.67 hours per year. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 cost of $16,181,529, or $1,965 per adviser.1232 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.1233 We do not anticipate that the amendments to add a new Part 3 will affect the per adviser cost burden for those existing requirements but 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. We do not anticipate external costs to investment advisers in the form of website set-up, maintenance, or licensing fees because they will 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. In the Proposing Release, we estimated that an external service provider would spend 3 hours helping an adviser prepare an initial relationship summary. While we received no specific comments on our estimate regarding external costs in the Proposing release, one commenter suggested that there would be additional 1232 59,273 is the total aggregate initial hour burden for preparing and filing a relationship summary. We believe that performance of this function will most likely be equally allocated between a senior compliance examiner and a compliance manager. Data from the Securities Industry Financial Markets Association’s Management & Professional Earnings in the Securities Industry 2013 (‘‘SIFMA Management and Professional Earnings Report’’), modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 (professionals) or 2.93 (office) to account for bonuses, firm size, employee benefits, and overhead, suggest that costs for these positions are $237 and $309 per hour, respectively. (59,273 hours × 50% × $237) + (59,273 hours × 50% × $309 = $16,181,529). $16,181,529/8,235 investment advisers = $1,965 per investment adviser. The SIFMA Management and Professional Earnings Report was updated in 2019 to reflect inflation. The numbers in the report are higher than the numbers we used in the Proposing Release and, along with the higher hourly burden, result in higher cost estimates in this release, relative to the proposal. 1233 See 2016 Form ADV Paperwork Reduction Analysis, supra footnote 1209, at 81 FR 60452. 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 00289 Fmt 4701 Sfmt 4700 33605 implementation costs such as legal advice, but that these costs are difficult to quantify.1234 Another argued that that the current burden estimates for Form ADV did not take into consideration the time spent on learning about the complexities of what is needed to comply with similar requirements.1235 Based on the concerns expressed by these commenters and the changes we are making to the relationship summary, we are increasing the estimate relative to the proposal from 3 to 5 hours. 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, particularly given our experience with the burdens for Form ADV.1236 Although advisers that will 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 strict page limits will make it unlikely that the amount of time, and thus cost, required for outside legal and compliance review will vary substantially among those advisers who elect to obtain outside assistance. Most of the information required in the relationship summary is readily available to investment advisers from Form ADV Part 2A, and the narrative descriptions are concise, brief, and at a summary level. As a result, we continue to anticipate, as discussed in the proposal, that only 25% of investment advisers will seek the help of outside legal services and 50% of investment advisers will seek the help of compliance consulting services in connection with the initial preparation of the relationship summary.1237 We estimate that the initial per existing adviser cost for legal services related to 1234 See NSCP Letter. Marotta Letter. 1236 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. See Brochure Adopting Release, supra footnote 576, at 75 FR at 49257. In comparison, as discussed above, the relationship summary is limited to two pages in length for standalone investment advisers and four pages in length for dual registrants in paper format (or equivalent in electronic format). 1237 See Proposing Release, supra footnote 5 at Section V.A. We did not receive comments on these estimates. While we recognize that the instructions have changed, we continue to believe that only 25% of advisers will seek help of outside legal services and 50% of advisers will seek compliance consulting services, and that these estimates are appropriate for purposes of the PRA analysis, particularly given our experience with the external burdens for Form ADV Parts 1 and 2. 1235 See E:\FR\FM\12JYR2.SGM 12JYR2 33606 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations the preparation of the relationship summary will be $2,485.1238 We estimate that the initial per existing adviser cost for compliance consulting services related to the preparation of the relationship summary will be $3,705.1239 Thus, the incremental external cost burden for existing investment advisers is estimated to be $20,371,331, or $6,790,444 annually when amortized over a three-year period.1240 In addition, we estimate that 1,227 new advisers will register with us annually, 656 of which will be required to prepare a relationship summary. For these 656 new advisers, we estimate that they will require $1,622,780 in external costs to prepare the relationship summary, or $540,927 amortized over three years.1241 In summary, the annual external legal and compliance consulting cost for existing and new advisers relating to obligations to prepare the relationship summary is estimated to total $7,331,370, or $825 per adviser.1242 jbell on DSK3GLQ082PROD with RULES2 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. 1238 External legal fees are in addition to the projected hour per adviser burden discussed above. Data from the SIFMA Management and Professional Earnings Report suggest that outside legal services cost approximately $497 per hour. $497 per hour for legal services × 5 hours per adviser = $2,485. The hourly cost estimate of $497 is based on an inflation-adjusted figure and our consultation with advisers and law firms who regularly assist them in compliance matters. 1239 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, suggest that outside management consulting services cost approximately $741 per hour. $741 per hour for outside consulting services × 5 hours per adviser = $3,705. 1240 25% × 8,235 existing advisers × $2,485 for legal services = $5,115,994 for legal services. 50% × 8,235 existing advisers × $3,705 for compliance consulting services = $15,255,338. $5,115,994 + $15,255,338 = $20,371,331 in external legal and compliance consulting costs for existing advisers. $20,371,333/3 = $6,790,444 annually. 1241 25% × 656 new advisers × $2,485 for legal services = $407,540. 50% × 656 new advisers × $3,705 for compliance consulting services = $1,215,240. $407,540 + $1,215,240 = $1,622,780 in external legal and compliance consulting costs for new advisers. $1,622,780/3 = $540,927.annually in external legal and compliance consulting costs for newly registered advisers. 1242 $6,790,444 in annual external legal and compliance consulting costs for existing advisers + $540,927 annually for new advisers = $7,331,370 annually for existing and new advisers. $7,331,370/ (8,235 existing advisers + 656 new advisers) = $825 per adviser. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 In the Proposing Release, we estimated that the relationship summary would increase the annual burden associated with Form ADV by 0.5 hours 1243 due to amendments to the relationship summary, for those advisers required to prepare and file a relationship summary. We did not receive comments regarding hour burdens associated with preparing and filing amendments to the relationship summary. As discussed in section II.C.4 above, in a change from the proposal, we are adding a requirement that firms preparing updated relationship summaries to existing clients also highlight the most recent changes by, for example, marking the revised text or including a summary of material changes.1244 To account for this change, we are increasing the annual burden to 1 hour per year to amend and file a relationship summary.1245 We do not expect amendments to be frequent, but based on the historical frequency of amendments made on Form ADV Parts 1 and 2, we estimate that on average, each adviser preparing a relationship summary will likely amend and file the disclosure an average of 1.71 times per year.1246 We therefore estimate that for making and filing amendments to their relationship summaries, advisers will incur an estimated total paperwork burden of 14,082 hours per year,1247 or approximately 1.58 hours per adviser,1248 for an annual monetized cost of $3,844,386, or $467 per adviser.1249 1243 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 footnote 1209, at 81 FR at 60452. 1244 Additionally, we are requiring that the additional disclosure showing the revised text or summarizing the material changes be attached as an exhibit to the unmarked relationship summary. 1245 We believe that the time estimated to prepare and file an amendment to the relationship summary is closer to the amount of time to prepare an interim-other-than-annual amendment to Form ADV. See, e.g., Brochure Adopting Release, supra footnote 576, at 75 FR at 49257. 1246 Based on IARD data as of December 31, 2018, 8,235 investment advisers with retail clients filed 14,118 other-than-annual amendments to Form ADV. 14,118 other-than-annual amendments/8,235 investment advisers = 1.71 amendments per investment adviser. We estimated in the Proposing Release that advisers with relationship summary obligations will amend and file disclosures on average of 1.8 times per year, based on IARD system data as of December 31, 2017. See Proposing Release, supra footnote 5 at Section V.A. 1247 8,235 investment advisers amending relationship summaries × 1.71 amendments per year × 1 hour = 14,082 hours. 1248 14,082 hours/(8,235 existing advisers + 656 new advisers) = 1.58 hours per year. 1249 14,082 is the total aggregate initial hour burden for amending relationship summaries. We PO 00000 Frm 00290 Fmt 4701 Sfmt 4700 Although advisers will be required to amend the relationship summary within 30 days whenever any information becomes materially inaccurate, we expect that amendments will require relatively minimal wording changes, given the relationship summary’s page limitation and summary nature. We believe that investment advisers will be more knowledgeable about the information to include in the amended relationship summaries than outside legal or compliance consultants and will be able to make these revisions inhouse. Therefore, we do not estimate that investment advisers will need to incur ongoing external costs for the preparation and review of relationship summary amendments. d. Incremental Increase to Form ADV Hourly and External Cost Burdens Attributable to Form ADV Part 3 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 73,355 hours,1250 or 8.25 hours per adviser,1251 and a monetized cost of $20,025,915, or $2,252 per adviser.1252 The incremental external legal and compliance cost is estimated to be $7,331,370.1253 believe that performance of this function will most likely be equally allocated between a senior compliance examiner and a compliance manager. Data from the SIFMA Management and Professional Earnings Report suggest that costs for these positions are $237 and $309 per hour, respectively. (14,082 hours × 50% × $237 + 14,082 hours × 50% × $309 = $3,844,386. $3,844,386/8,235 investment advisers = $467 per investment adviser. 1250 59,273 hours for initial preparation and filing of the relationship summary + 14,082 hours for amendments to the relationship summary = 73,355 total aggregate annual hour burden attributable to the Form ADV amendments to add Part 3: Form CRS. 1251 73,355 hours/(8,235 existing advisers + 656 newly registered advisers) = 8.25 hours per adviser. 1252 73,355 total aggregate annual hour burden for preparing, filing, and amending a relationship summary. We believe that performance of this function will most likely be equally allocated between a senior compliance examiner and a compliance manager. Data from the SIFMA Management and Professional Earnings Report suggest that costs for these positions are $237 and $309 per hour, respectively. 73,355 hours × 50% × $237 = $8,692,568. 73,355 hours × 50% × $309 = $11,333,348. $8,692,568 + $11,333,348 = $20,025,915. $20,025,915/(8,235 existing registered advisers + 656 newly registered advisers) = $2,252 per adviser. 1253 See supra footnote 1242. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 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 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. One commenter said that the current Form ADV requirements are a burden to smaller firms and that the currently approved burdens for Form ADV Parts 1 and 2 are too low.1254 We disagree. We recognize that the burden for some advisers will exceed our estimate and the burden for others will be less due to the nature of their business, but we continue to believe that on average our estimates are appropriate for purposes of the PRA analysis. For example, the current burden estimates for Form ADV Parts 1 and 2 range from 15 hours for smaller advisers to 1989 hours for larger advisers.1255 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 amendments to Form ADV, equals 37.47 hours per adviser, with 8.25 hours attributable to the adopted amendments.1256 On an aggregate basis, this totals 333,146 hours for existing and newly registered advisers, with a monetized value of $90,978,858.1257 1254 See Marotta Letter. supra footnote 1221. 1256 29.22 hours + 8.25 hours for increase in burden attributable to initial preparation and filing of, and amendments to, relationship summary = 37.47 hours total. 1257 37.47 hours × (8,235 existing RIAs required to prepare a relationship summary + 656 newly registered RIAs required to prepare a relationship summary) = 333,146 total aggregate annual hour jbell on DSK3GLQ082PROD with RULES2 1255 See VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 As noted above, we estimate 5,064 of existing registered advisers will not have retail investors; therefore, they will not be obligated to prepare and file relationship summaries, so their annual per adviser hour burden will remain unchanged.1258 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 will be 164,655,1259 with a monetized value of $44,950,816.1260 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, will be 16,996 hours,1261 for a monetized cost of $4,639,908, or $983 per exempt reporting adviser.1262 In summary, factoring in the amendments to Form ADV to add Part 3, the revised annual aggregate burden for Form ADV for all registered advisers and exempt reporting advisers will be burden for preparing, filing and amending a relationship summary. We believe that performance of this function will most likely be equally allocated between a senior compliance examiner and a compliance manager. Data from the SIFMA Management and Professional Earnings Report suggest that costs for these positions are $237 and $309 per hour, respectively. 333,146 hours × 0.5 × $237 = $39,477,801. 333,146 hours × 0.5 × $309 = $51,471,057. $39,477,801 + $51,471,057 = $90,948,858. 1258 13,299 registered investment advisers—8,235 registered investment advisers with retail investors = 5,064 registered investment advisers without retail investors. 1259 29.22 hours × (5,064 existing and 571 newlyregistered investment advisers without retail investors) = approximately 164,655 total annual hour burden for RIAs not preparing a relationship summary. 1260 We believe 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 SIFMA Management and Professional Earnings Report suggest that costs for these positions are $237 and $309 per hour, respectively. 164,655 hours × 50% × $237 = $19,511,618. 164,655 hours × 50% × $309 = $25,439,198. $19,511,618 + $25,439,198 = $44,950,816. 1261 3.60 hours × 4,280 exempt reporting advisers currently + 441 new exempt reporting advisers = 16,996 hours. 1262 As with preparation of the Form ADV for registered advisers, we believe 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 SIFMA Management and Professional Earnings Report suggest that costs for these positions are $237 and $309 per hour, respectively. 16,996 hours × 0.5 × $237 = $2,014,026. 16,996 hours × 0.5 × $309 = $2,625,882. $2,014,026 + $2,625,882 = $4,639,908. $4,639,908/(4,280 exempt reporting advisers currently + 441 new exempt reporting advisers) = $983 per exempt reporting adviser. PO 00000 Frm 00291 Fmt 4701 Sfmt 4700 33607 514,797,1263 for a monetized cost of $140,569,582.1264 This results in an annual blended average per adviser burden for Form ADV of 29.28 hours 1265 and $7,996 per adviser.1266 This is an increase of 151,715 hours, 1267 or $48,165,213 1268 in the monetized value of the hour burden, from the currently approved annual aggregate burden estimates, increases which are attributable primarily to the larger registered investment adviser and exempt reporting adviser population since the most recent approval, adjustments for inflation, and the amendments to Form ADV to add Part 3. 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.1269 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.1270 We do 1263 333,146 annual hour burden for RIAs preparing relationship summary + 164,655 annual hour burden for RIAs not preparing relationship summary + 16,996 annual hour burden for exempt reporting advisers = 514,797 total updated Form ADV annual hour burden. 1264 $90,948,858 for RIAs preparing relationship summary + $44,950,816 for RIAs not preparing relationship summary + $4,639,908 for exempt reporting advisers = $140,539,582 total updated Form ADV annual monetized hourly burden. 1265 514,797/(13,299 registered investment advisers + 4,280 exempt reporting advisers) = 29.28 hours per adviser. 1266 $140,569,582/13,299 registered investment advisers + 4,280 exempt reporting advisers) = $7,995 per adviser. 1267 514,797 hours estimated—363,082 hours currently approved = 151,715 hour increase in aggregate annual hourly burden. 1268 $140,569,582 monetized hourly burden— $92,404,369 = $48,135,213 increase in aggregate annual monetized hourly burden. 1269 See 2016 Form ADV Paperwork Reduction Analysis, supra footnote 1209, at 81 FR 60452. We do not anticipate that the amendments we are adopting 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 compliance consulting services for the relationship summary are in addition to the estimated hour burden discussed above. 1270 See 2016 Form ADV Paperwork Reduction Analysis, supra footnote 1209, at 81 FR at 60452– E:\FR\FM\12JYR2.SGM Continued 12JYR2 jbell on DSK3GLQ082PROD with RULES2 33608 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 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 aggregate cost of obtaining the fair value of private fund assets is likely to 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, 2018, 4,806 registered advisers advise private funds. We therefore estimate that approximately 288 registered advisers may incur costs of $37,625 each on an annual basis, for an aggregate annual total cost of $10,836,000.1271 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 relationship summary, we estimate the annual aggregate external cost burden of the Form ADV information collection will be $21,767,370, or $1,637 per registered adviser.1272 This represents an $8,083,870 increase from the current external costs estimate for the information collection.1273 copies of each relationship summary. Investment advisers will 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. These records will 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 for the Form ADV Part 2A brochure under the Advisers Act rule 204– 2(a)(14)(i), to allow regulators to access the relationship summary during an examination.1274 As discussed above in Section II.E several commenters suggested that our estimated burdens for the relationship summary recordkeeping obligations were too low.1275 Some commenters argued that keeping records of when a relationship summary was given to prospective retail clients would be unnecessarily burdensome or not feasible, and was not adequately considered in the Commission’s burden estimates.1276 One of these commenters said that it would be difficult for firms to integrate pre-relationship delivery dates into their operational systems and procedures, and that there is no way to track when a disclosure is accessed on a website.1277 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. The amendments to rule 204–2 will require registered advisers to retain 1274 Specifically, investment advisers will be required to maintain and preserve records 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. See Advisers Act rule 204–2(e)(1). 1275 See, e.g., CCMC Letter; SIFMA Letter. See also NSCP Letter (estimating 80–500 hours to prepare, deliver, and file the relationship summary, including recordkeeping policies and procedures). 1276 See, e.g., CCMC Letter; SIFMA Letter; Committee of Annuity Insurers Letter; Edward Jones Letter. A few others stated that creating recordkeeping policies and procedures relating to how professionals respond to ‘‘key questions’’ would be burdensome and extremely difficult. See, e.g., LPL Financial Letter. Although the final instructions require ‘‘conversation starter’’ questions that are similar to the proposed ‘‘key questions,’’ we are not increasing the burden as urged by commenters. As discussed in Section V.A.2.a. above, we increased the burden estimates for the initial preparation of the relationship summary, acknowledging, among other things, that certain advisers that provide automated investment advisory services will incur additional burdens to develop written answers to the conversation starters and make those available on their websites with a hyperlink to the appropriate page in the relationship summary for these documents (i.e., robo-advisers). However, we do not expect these advisers to incur additional recordkeeping burdens under amendments to rule 204–2 because we are not establishing new or separate recordkeeping obligations related to the conversation starters or the answers provided by firms in response to the conversation starters. See supra footnotes 814–816. 1277 See SIFMA Letter. 53. The $10,083,500 is based on 4,469 registered advisers reporting private fund activity as of May 16, 2016. 1271 6% × 4,806 = 288 advisers needing to obtain the fair value of certain private fund assets. 288 advisers × $37,625 = $10,836,000. 1272 $3,600,000 for preparation of Form ADV Part 2 + $10,836,000 for registered investment advisers to fair value their private fund assets + $7,331,370 (see supra footnote 1242) to prepare relationship summary = $21,767,370 in total external costs for Form ADV. $21,767,370/13,299 total registered advisers as of December 31, 2018 = $1,637 per registered adviser. 1273 $21,767,370—$13,683,500 = $8,083,870. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00292 Fmt 4701 Sfmt 4700 Based on our experience with similar requirements for Form ADV Part 2A brochures, we disagree with commenters that retaining records of when a relationship summary was given to prospective retail clients would be significantly more burdensome for investment advisers than our proposed estimate of 0.2 hours. While we recognize that this recordkeeping requirement will impose some additional burden on investment advisers that must prepare and deliver relationship summaries, advisers are already required to keep similar records for the delivery of the Form ADV Part 2A brochures and the currently approved burden for that requirement is 1.5 hours. Accordingly, based on our experience, advisers already maintain this information with respect to their brochures and should be able to update their systems to also include the relationship summary. We also do not expect that investment advisers will incur additional external costs to make and keep these records because we believe that advisers will create and retain them in a manner similar to their current recordkeeping practices for the Form ADV Part 2A brochure. 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 will facilitate the Commission’s ability to inspect for and enforce compliance with firms’ obligations with respect to the relationship summary. The information generally is kept confidential.1278 The likely respondents to this collection of information are all of the approximately 13,299 advisers currently registered with the Commission. We estimate that based on updated IARD data as of December 31, 2018, 8,235 existing advisers will be subject to the amended provisions of rule 204–2 to preserve the relationship summary as a result of the adopted amendments. 1. Changes in Burden Estimates and New Burden Estimates The currently approved annual aggregate burden for rule 204–2 is 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 1278 See E:\FR\FM\12JYR2.SGM section 210(b) of the Advisers Act. 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 adviser.1279 We estimate that the requirements to make and keep copies of each relationship summary under the amendments to rule 204–2 will result in an increase in the collection of information burden estimate by 0.2 hours 1280 for each of the estimated 8,235 registered advisers with relationship summary obligations, resulting in a total of 183.2 hours per adviser. This will yield an annual estimated aggregate burden of 1,508,652 hours under amended rule 204–2 for all registered advisers with relationship summary obligations,1281 for a monetized cost of $95,588,191, or $11,607 per adviser.1282 In addition, the 5,064 advisers not subject to the amendments will continue to be subject to an unchanged burden of 183 hours under rule 204–2, or a total aggregate annual hour burden of 926,712,1283 for a monetized cost of $58,716,472, or $11,595 per adviser.1284 The increase in the collection of information burden 1279 See 2016 Form ADV Paperwork Reduction Analysis, supra footnote 1209, at 81 FR at 60454– 55. 1280 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 the relationship summary is already included in the collection of information estimates for Form ADV, we estimate that recordkeeping burden for the relationship summary will be considerably less than 1.5 hours and estimate that 0.2 hours is appropriate. 1281 8,235 registered investment advisers required to prepare relationship summary × 183.2 hours = 1,508,652 hours. 1282 As with our estimates relating to the previous amendments to Advisers Act rule 204–2 (see 2016 Form ADV Paperwork Reduction Analysis, supra footnote 1209, 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, suggest that costs for these position are $70 and $62, respectively. (17% × 1,508,652 hours × $70) + (83% × 1,508,652 hours × $62) = $95,588,191. $95,588,191/8,235 advisers = $11,607 per adviser. 1283 5,064 registered investment advisers not required to prepare the relationship summary × 183 hours = 926,712. 1284 As with our estimates relating to the previous amendments to Advisers Act rule 204–2 (see 2016 Form ADV Paperwork Reduction Analysis, supra footnote 1209, 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 $70 and $62, respectively. (17% × 926,712 hours × $70) + (83% × 926,712 hours × $62) = $58,716,473. $58,716,473/5,064 = $11,595 per adviser. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 estimate by 0.2 hours as a result of the amendments to rule 204–2 will therefore result in an annual monetized cost of $12 per adviser.1285 In summary, taking into account the estimated annual burden of registered advisers that will 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 amendments, is estimated to be 2,435,364 total hours,1286 for a monetized cost of $154,304,663.1287 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.1288 The revised annual aggregate hourly burden for rule 204–2 will be 2,435,364 1289 hours, represented by a monetized cost of $154,304,664,1290 based on an estimate of 8,235 registered advisers with the relationship summary obligation and 5,064 registered advisers without, as noted above. This represents an increase of 235,573 1291 annual aggregate hours in the hour burden and an annual increase of $23,988,552 from the currently approved total aggregate monetized cost for rule 204–2.1292 These increases are attributable to a larger registered investment adviser population since the most recent approval and adjustments for inflation, as well as the rule 204–2 amendments relating to the relationship summary as discussed in this release. C. Rule 204–5 under the Advisers Act New rule 204–5 will require an investment adviser to deliver an electronic or paper version of the relationship summary to each retail investor before or at the time the adviser enters into an investment advisory contract with the retail investor. The 1285 $11607 aggregate burden per adviser subject to relationship summary¥$11,595 aggregate burden per adviser not subject to the relationship summary = $12. 1286 8,235 registered investment advisers required to prepare relationship summary × 183.2 hours = 1,508,652 hours. 5,064 registered investment advisers not required to prepare the relationship summary × 183 hours = 926,712 hours. 1,508,652 hours + 26,712 hours = 2,435,364 hours. 1287 $95,588,191 + $58,716,473 = $154,304,664. 1288 2,199,791 hours/12,024 registered advisers = 183 hours per adviser. 1289 See supra footnote 1286. 1290 See supra footnote 1287. 1291 2,435,364 hours¥2,199,791 hours = 235,573 hours. 1292 $154,304,664¥$130,316,112 = $23,988,552. PO 00000 Frm 00293 Fmt 4701 Sfmt 4700 33609 adviser also will make a one-time initial delivery of the relationship summary to all existing clients within a specified time period after the effective date of the rule. Also with respect to existing clients, the adviser will deliver the most recent relationship summary before or at the time of (i) opening any new account that is different from the retail investor’s existing account(s); (ii) recommending that the retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) recommending or providing a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in the existing account.1293 The adviser will be required to post a current version of its relationship summary prominently on its public website (if it has one), and will be required to communicate any changes in an amended relationship summary to retail investors who are existing clients within 60 days, instead of 30 days as proposed, after the amendments are required to be made and without charge.1294 The investment adviser also must deliver a current relationship summary to each retail investor within 30 days upon request. In a change from the proposal, an adviser must make a copy of the relationship summary available upon request without charge, and where a relationship summary is delivered in paper format, the adviser may link to additional information by including URL addresses, QR codes, or other means of facilitating access to such information.1295 The adviser must also include a telephone number where retail investors can request up-to-date information and a copy of the relationship summary.1296 1293 We are adopting these requirements instead of the proposed requirements that advisers deliver the relationship summary to existing retail investor clients before or at the time of opening a new account that is different from the retail investor’s existing account or changes are made to the retail investor’s existing account(s) that would ‘‘materially change’’ the nature or scope of the firm’s relationship with the retail investor. See Proposing Release, supra footnote 5 at Section II.C.2. 1294 The communication can be made by delivering the relationship summary or by communicating the information through another disclosure that is delivered to the retail investor. 1295 Additionally, we are adopting the instruction that if a relationship summary is delivered in paper format as part of a package of documents, the firm must ensure that the relationship summary is the first among any documents that are delivered at that time, substantially as proposed. See supra footnote 701. 1296 This differs from the proposal, which required only firms that do not have a public website to include a toll-free number that retail E:\FR\FM\12JYR2.SGM Continued 12JYR2 33610 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations As discussed further below, we received comments that our estimated burdens for delivery of the relationship summary were too low. Some of these comments focused on the administrative and operational burdens related to monitoring for changes that would ‘‘materially change’’ the nature and scope of the relationship and thereby require delivery to existing clients and customers.1297 One commenter also argued that imposing different delivery requirements for the Form ADV, Part 2 brochure and the relationship summary would create substantial administrative burdens specifically for investment advisers.1298 Other comments focused on the recordkeeping burdens related to the requirement to deliver the relationship summary to a new or prospective retail investor.1299 As discussed further below, we made changes to the proposal to require more specific triggers for initial delivery and additional delivery to existing customers in order to replace the requirements in response to comments. We discuss below the specific separate delivery requirements and modifications. 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 will 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 will use the information to determine eligibility for registration with us and to manage our regulatory and examination programs. This collection of information will be found at 17 CFR 275.204–5 and will be mandatory. Responses will not be kept confidential. 1. Respondents: Investment Advisers jbell on DSK3GLQ082PROD with RULES2 The likely respondents to this information collection will be the approximately 8,235 investment advisers registered with the Commission that will be required to deliver a relationship summary per new rule 204–5. We also note that these figures include the 318 registered brokerinvestors may call to request documents. See supra footnote 609. 1297 See, e.g., Cambridge Letter; SIFMA Letter; LPL Financial Letter. 1298 Pickard Djinis and Pisarri Letter. 1299 See supra footnotes 803–808. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 dealers that are dually registered as investment advisers.1300 2. Initial and Annual Burdens a. Posting of the Relationship Summary to Website Under new rule 204–5, advisers will be required to post a current version of their relationship summary prominently on their public website (if they have one). In the Proposing Release, we estimated that each adviser will incur 0.5 hours to prepare the posted relationship summary, such as to ensure proper electronic formatting and to post the disclosure to the adviser’s website, if the adviser has one.1301 Although we did not receive any comments regarding burdens associated with posting of the relationship summary to a public website, we are increasing our estimate of the time from 0.5 to 1.5 hours based on the staff’s experience.1302 We do not anticipate that investment advisers will incur additional external costs to post the relationship summary to the adviser’s website because advisers without a public website will not be required to establish or maintain one, and advisers with a public website have already incurred external costs to create and maintain their websites. Additionally, external costs for the preparation of the relationship summary are already included for the collection of information estimates for Form ADV, in Section A.2.b, above. Based on IARD system data, 91.6% of investment advisers with individual clients report having at least one public website.1303 Therefore, we estimate that 91.6% of the 8,235 existing and 656 newly registered investment advisers with relationship summary obligations will incur a total of 12,216 aggregate burden hours to post relationship summaries to their websites,1304 with a 1300 See supra footnote 863 and accompanying text. 1301 Proposing Release, supra footnote, 5 at section V.C.2.a. 1302 See e.g., Optional internet Availability of Investment Company Shareholder Reports, Investment Company Act Release No. 33115 (June 5, 2018) [83 FR 29158 (Jun. 22, 2018)] (estimating that funds that already post shareholder reports on their websites will require a half hour burden per fund to comply with the annual compliance and posting requirements of rule 30e–3, and funds that do not already post shareholder reports to their websites will require one and half hours to post the required documents online). Posting of the relationship summary under rule 204–5 pertains to one document, which is similar to the shareholder report posting to which rule 30e–3 applies. 1303 We estimated in the Proposing Release that 91.1 of investment advisers with individual clients report at least one public website, based on IARD system data as of December 31, 2017. See Proposing Release, supra footnote 5 at Section V.C.1. 1304 1.5 hours to prepare and post the relationship summary × 91.6% × (8,235 existing advisers + 656 PO 00000 Frm 00294 Fmt 4701 Sfmt 4700 monetized cost of $757,407.1305 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.1306 Therefore, the total annual aggregate hourly burden related to the initial posting of the relationship summary is estimated to be 4,072 hours, with a monetized cost of $252,469.1307 We did not receive comments regarding burdens associated with posting of the relationship summary to a public website. b. Delivery to Existing Clients (1) One-Time Initial Delivery to Existing Clients The burden for this new rule is based on each adviser with retail investors having, on average, an estimated 3,985 clients who are retail investors.1308 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 2A brochures and brochure supplements to their clients.1309 As with the estimates for rule 204–3, we estimate that advisers will require approximately 0.02 hours to deliver the relationship summary to each client.1310 We did not receive comments on the burdens specific to delivering the relationship summary to newly-registered advisers with relationship summary obligations) = 12,216 hours. 1305 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 $62 per hour. 1.5 hours per adviser × $62 = $93 in monetized costs per adviser. $93 per adviser × 91.6% × (8,235 existing advisers + 656 newly registered advisers) = $757,407 total aggregate monetized cost. 1306 See 2016 Form ADV Paperwork Reduction Analysis, supra footnote 1209. 1307 12,216 hours/3 years = 4,072 hours annually. $757,407/3 years = $252,469 in annualized monetized costs. 1308 This estimate is based on IARD system data as of December 31, 2018. 1309 See Brochure Adopting Release, supra footnote 576, at 75 FR at 49259. 1310 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 footnote 576, at 75 FR at 49259 The burden for preparing relationship summaries is already incorporated into the burden estimate for Form ADV discussed above. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations existing clients under new Rule 204–5. We estimate the total burden hours for 8,235 advisers for initial delivery of the relationship summary to existing clients to be 79.7 hours per adviser, or 708,613 total aggregate hours, for the first year after the rule is in effect,1311 with a monetized cost of $4,941 1312 per adviser or $43,930,431 in aggregate.1313 Amortized over three years, the total annual hourly burden is estimated to be 26.57 hours per adviser, or 236,204 annual hours in aggregate,1314 with annual monetized costs of $1,647 per adviser, or $14,643,477 in aggregate.1315 We do not expect that investment advisers will incur external costs for the initial delivery of the relationship summary to existing clients because we estimate that advisers will make such deliveries along with another required delivery, such as an interim or annual update to the Form ADV Part 2A. jbell on DSK3GLQ082PROD with RULES2 (2) Additional Delivery to Existing Clients As discussed in Section II.C.3.c above, the proposed instructions would have required investment advisers to deliver the relationship summary to existing retail investor clients before or at the time firms open a new account that is different from the retail investor’s existing account or changes are made to the retail investor’s existing account(s) that would ‘‘materially change’’ the nature or scope of the firm’s relationship with the retail investor. In response to comments seeking additional clarity on when the ‘‘materially change’’ requirement would apply, and expressing concerns that there will be additional supervisory, administrative, and operational processes required, and burdens imposed, we replaced the ‘‘materially 1311 (0.02 hours per client × 3,985 retail clients per adviser) = 79.7 hours per adviser. 79.7 hours per adviser × (8,235 existing advisers + 656 newly registered advisers) = 708,613 total aggregate hours. 1312 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 $62 per hour. 79.7 hours per adviser × $62 = $4,941 in monetized costs per adviser. We estimate that advisers will not incur any incremental postage costs because we estimate 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. 1313 $4,941 in monetized costs per adviser × (8,235 existing advisers + 656 newly registered advisers) = $43,930,431 in total aggregate costs. 1314 79.7 initial hours per adviser/3 = 26.57 total annual hours per adviser. 708,613 initial aggregate hours/3 = 236,204 total annual aggregate hours. 1315 $4,941 in monetized costs per adviser/3 = $1,647 annualized monetized cost per adviser. $43,930,431 initial aggregate monetized cost/3 = $14,643,477 in total annual aggregate monetized cost. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 change’’ requirement with more concrete delivery triggers that firms could more easily implement based on their existing systems and processes.1316 Investment advisers will be required to deliver the relationship summary to existing clients before or at the time they open a new account that is different from the retail investor’s existing account(s), as proposed. In addition, in a change from the proposal, delivery will be required before or at the time the adviser (i) recommends that the retail investor roll over assets from a retirement account into a new or existing account or investment, or (ii) recommends or provides a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in the existing account. We are adopting these two triggers instead of the proposed requirement to deliver the relationship summary before or at the time changes are made to the existing account that would ‘‘materially change’’ the nature and scope of the relationship to address commenters’ requests for additional guidance or examples of what would constitute a ‘‘material change.’’ 1317 Commenters also described administrative and operational burdens arising from this requirement and argued that our estimated burdens were too low.1318 One commenter asserted that firms would be required to build entirely new operational and supervisory processes to identify asset movements that could trigger a delivery requirement.1319 Another commenter noted the challenges of designing a system that distinguishes non-ordinary course events from routine account changes.1320 As discussed above, we replaced the ‘‘materially change’’ requirement with more specific triggers to be clearer about when a relationship summary must be delivered.1321 While these specific triggers will still impose operational and supervisory burdens on firms, we believe that they are more easily identified and monitored, such that firms will not incur significant burdens as described by commenters to 1316 See supra footnotes 758–763 and accompanying text. 1317 See Prudential Letter; TIAA Letter; Cambridge Letter; SIFMA Letter; LPL Financial Letter; Institute for Portfolio Alternatives Letter. 1318 See, e.g., SIFMA Letter; LPL Financial Letter. 1319 See SIFMA Letter. 1320 See LPL Letter. 1321 These more specific triggers are intended to address circumstances that the proposed ‘‘materially change’’ sought to address. See supra footnote 761 and accompanying text. PO 00000 Frm 00295 Fmt 4701 Sfmt 4700 33611 implement entirely new supervisory, administrative, and operational processes needed to monitor events that cause a material change. However, recognizing that some additional processes will be necessary to implement these delivery triggers, we are increasing our burden estimate from 0.02 to 0.04 hours. We now estimate that each adviser will incur 16 hours per year to deliver the relationship summary in these types of situations, and that delivery under these circumstances will take place among 10% of an adviser’s retail investors annually.1322 We will therefore estimate a total annual aggregate hours of 142,256,1323 with a monetized cost of $992 per adviser 1324 and $8,818,872 in aggregate.1325 (3) Posting of Amended Relationship Summaries to websites and Communicating Changes to Amended Relationship Summaries, Including by Delivery Investment advisers will be required to amend their relationship summaries within 30 days when any of the information becomes materially inaccurate. Investment advisers also will be required to communicate any changes in an amended relationship summary to existing clients who are retail investors within 60 days, instead of 30 days as proposed, after the updates are required to be made and without charge. We do not expect this change to increase the PRA estimates.1326 The communication can be made by delivering the relationship summary or through another disclosure that is 1322 10% of 3,985 retail clients per adviser × .04 hours to deliver the relationship summary = 16 hours per adviser. 1323 16 hours × (8,235 existing advisers + 656 new advisers) = 142,256 total aggregate hours. 1324 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 $62 per hour. 16 hours per adviser × $62 = $992 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 estimate 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. 1325 $992 in monetized costs per adviser × (8,235 existing advisers + 656 newly registered advisers) = $8,819,872 in total aggregate costs. 1326 As discussed in Section V.A.2.c., we have increased the burden estimates for preparing amendments to the relationship summary, acknowledging, among other things, that firms will incur additional burdens to prepare and file amendments as a result of the instructions that firms preparing amendments highlight the most recent changes, and that additional disclosure showing the revised text be attached as an exhibit to the unmarked relationship summary. E:\FR\FM\12JYR2.SGM 12JYR2 33612 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 delivered to the retail investor. This requirement is a change from the proposed requirement but is substantively similar.1327 Commenters did not comment on the estimated burden. We have determined not to change the burden relative to the proposal. Based on the historical frequency of amendments made on Form ADV Parts 1 and 2, we estimate that on average, each adviser preparing a relationship summary will likely amend the disclosure an average of 1.71 times per year.1328 We are not changing the 0.5 hours estimates to post the amendments to a public website, consistent with our estimates at proposal. Using the same percentage of investment advisers reporting public websites, 91.6% of 8,235 advisers will incur a total annual burden of 0.86 hours per adviser, or 6,487 hours in aggregate,1329 to post the amended relationship summaries to their website. This translates into an annual monetized cost of $53.32 per adviser, or $402,207 in the aggregate for existing registered advisers with relationship summary obligations.1330 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. We did not receive comments on this estimate. We believe that it is likely that the other 50% of advisers will incorporate all of the updated information in their Form ADV Part 2, like the summary of material changes or other disclosures, which 1327 The proposed instructions would have required firms to communicate updated information by delivering the amended relationship summary or by communicating the information another way. The revised instruction will eliminate the wording ‘‘another way’’ and will clarify that the communication can be made through another disclosure that is delivered to the retail investor. See supra footnote 767. 1328 We estimated in the Proposing Release that each adviser preparing a relationship summary will likely amend the disclosure an average 1.81 times based on IARD system data as of December 31, 2017. See Proposing Release, supra footnote 5 at section V.C.2.b.iii. We are updating the average number to 1.71 times per year based on IARD system data as of December 31, 2018. 1329 0.5 hours to post the amendment × 1.71 amendments annually = 0.86 hours per adviser annually to post amendments to the website. 0.86 × 8,235 existing advisers amending the relationship summary × 91.6% of advisers with public websites = 6,487 aggregate annual hours to post amendments of the relationship summary. 1330 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 $62 per hour. 0.86 hours per adviser × $62 = $53.32 per adviser. $53.32 per adviser × 91.6% × 8,235 existing advisers = $402,207 in annual monetized costs. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 they are already obligated to deliver in order to avoid having to deliver two documents. We estimate a burden of 561,162 hours,1331 or 136.29 hours per adviser,1332 at a monetized cost of $34,792,044 in aggregate,1333 or $8,450 per adviser,1334 for the 50% of advisers that choose to deliver amended relationship summaries in order to communicate updated information.1335 In a change from the proposal,1336 we are also adopting two requirements not included in the proposal. First, all firms will be required to make available a copy of the relationship summary upon request without charge. Second, in a relationship summary that is delivered in paper format, firms may link to additional information by including URL addresses, QR codes, or other means of facilitating access to such information.1337 We believe that these new requirements will increase the burden relative to the proposal for some firms that do not currently fulfill these types of disclosure requests, including, for example, additional costs associated with tracking delivery preferences related to making copies of the relationship summary available upon request, and printing and mailing costs advisers amending the relationship summary × 3,985 retail clients per adviser × 50% delivering the amended relationship summary to communicate updated information × 0.02 hours per delivery × 1.71 amendments annually = 561,162 hours to deliver amended relationship summaries. 1332 3,985 retail clients per adviser × 0.02 hours per delivery × 1.71 amendments annually = 136.29 hours per adviser. 1333 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 $62 per hour. 561,162 hours × $62 = $34,792,044. 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 estimate 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. 1334 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 $62 per hour. 136.29 hours per adviser × $62 per hour = $8,450 per adviser. 1335 For the other 50% of advisers that may choose to communicate updated information in another disclosure, we estimate no added burden because these advisers will be communicating the information in other disclosures they are already delivering like the Form ADV Part 2 brochure or summary of material changes. 1336 See supra footnotes 699–701 and accompanying text. 1337 We are adopting the instruction that if a relationship summary is delivered in paper format as part of a package of documents, it should be the first among any documents that are delivered at the same time, as proposed. See supra footnote 701. PO 00000 1331 8,235 Frm 00296 Fmt 4701 Sfmt 4700 for copies that are delivered in paper. We estimate that the 8,235 advisers with relationship summary obligations, on average, will require 0.5 hours each annually to comply with this requirement. Therefore, we estimate that the 8,235 advisers will incur a total of 4,118 aggregate burden hours to make copies of the relationship summary available upon request,1338 with a monetized cost per adviser of $31, or $255,285 in aggregate monetized cost.1339 We acknowledge that the burden may be more or less than 0.5 hours for some advisers, but we believe that, on average, 0.5 hours is an appropriate estimate for calculating an aggregate burden for the industry for this collection of information. We do not expect investment advisers to incur external costs in delivering amended relationship summaries or communicating the information in another way because we estimate that they will make this delivery with, or as part of, other disclosures required to be delivered, such as an interim or annual update to Form ADV. We did not receive comments on this assumption in the proposal. c. Delivery to New Clients or Prospective New Clients Data from the IARD system indicate that of the 13,299 advisers registered with the Commission, 8,235 have retail investors, and on average, each has 3,985 clients who are retail investors.1340 As proposed, we estimate that the client base for investment advisers will grow by approximately 4.5% annually.1341 Based on our experience with Form ADV Part 2, we estimate the annual hour burden for initial delivery of a relationship summary will be the same by paper or electronic format, at 0.02 hours for each 1338 0.5 hours to make paper copies of the relationship summary available upon request × 8,235 advisers with relationship summary obligations = 4,118 hours. 1339 Based on data from the SIFMA Office Salaries Report, we expect that the requirement for advisers to make paper copies of the relationship summary available upon request will most likely be performed by a general clerk at an estimated cost of $62 per hour. 0.5 hours per adviser × $62 = $31 in monetized costs per adviser. $31 per adviser × 8,235 advisers with relationship summary obligations = $255,285 total aggregate monetized cost. 1340 This average is based on advisers’ responses to Item 5 of Part 1A of Form ADV as of December 31, 2018. 1341 In the Proposing Release, we determined this estimate based on IARD system data. See Proposing Release, supra footnote 5 at section V.C.c. 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. We did not receive comments on this estimate. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations relationship summary,1342 or 3.6 annual hours per adviser.1343 Therefore, we estimate that the aggregate annual hour burden for initial delivery of the relationship summary to new clients will be 29,646 hours,1344 at a monetized cost of $1,838,052, or $223 per adviser.1345 As in the Proposing Release, we continue to estimate that investment advisers will not incur external costs to deliver the relationship summary to new or prospective clients because they 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. We did not receive comments regarding the burdens for delivering the relationship summary to prospective clients that eventually become clients. d. Total New Initial and Annual Burdens jbell on DSK3GLQ082PROD with RULES2 All together, we estimate the total collection of information burden for new rule 204–5 to be 983,945 annual aggregate hours per year,1346 or 120 hours per respondent,1347 for a total annual aggregate monetized cost of 1342 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 footnote 576. 1343 3,985 clients per adviser with retail clients × 4.5% = 179 new clients per adviser. 179 new clients per adviser × 0.02 hours per delivery = 3.6 hours per adviser for delivery of a relationship summary to new or prospective new clients. 1344 3.6 hours per adviser for delivery obligation to new or prospective clients × 8,235 advisers = 29,646 hours. 1345 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 $62 per hour. 29,646 hours × $62 = $1,838,052. We estimate that advisers will not incur any incremental postage costs to deliver the relationship summary to new or prospective clients because we estimate that advisers will make the delivery along with other documentation normally provided in such circumstances, such as Form ADV Part 2. $1,838,052/8,235 investment advisers = $223 per adviser. 1346 4,072 annual hours for posting initial relationship summaries to adviser websites + 236,204 annual hours for initial delivery to existing clients + 142,256 hours for delivery to existing clients based on material changes to accounts or scope of relationship + 6,487 annual hours to post amended relationship summary to website + 561,162 hours for delivery to existing clients to communicate updated information in amended relationship summaries + 29,646 hours for delivery to new or prospective clients + 4,118 hours to make paper copies of the relationship summary available upon demand = 983,945 annual total hours for investment advisers to post and deliver the relationship summary under proposed rule 204–5. 1347 983,945 hours (initial and other deliveries)/ 8,235 advisers = 120 hours per adviser. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 $61,003,406,1348 or $7,408 1349 per adviser. D. Form CRS and Rule 17a–14 under the Exchange Act New rule 17a–14 under the Exchange Act [17 CFR 240.17a–14] and Form CRS [17 CFR 249.640] will require a brokerdealer that offers services to retail investors to prepare and 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 will deliver the relationship summary to both existing customers and new or prospective customers who are retail investors. In a change from the proposal, brokerdealers will file the relationship summary through Web CRD® instead of EDGAR. We are also requiring that all relationship summaries be filed with machine-readable headings, in a change from the proposal, as well as in a textsearchable format as proposed. New 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 the relationship summary 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 will be found at 17 CFR 249.640 and will be mandatory. Responses will not be kept confidential. As discussed in Sections I and II of this release, we received comments that addressed whether the relationship summary is necessary for brokerdealers, and whether we could further minimize the burden of the proposed collections of information. One 1348 $252,469 for posting initial relationship summaries to adviser websites + $14,643,477 for initial delivery to existing clients + $8,819,872 for delivery to existing clients based on material changes to accounts or scope of relationship + $402,207 to post amended relationship summary to website + $34,792,044 for delivery to existing clients to communicate updated information in amended relationship summaries + $1,838,052 for delivery to new or prospective clients + $255,285 for making paper copies of the relationship summary available upon demand = $61,003,406 in total annual aggregate monetized cost for investment advisers to post and deliver the relationship summary under proposed rule 204–5. 1349 $61,003,406/8,235 advisers = $7,408 per adviser. PO 00000 Frm 00297 Fmt 4701 Sfmt 4700 33613 commenter specifically addressed the accuracy of our burden estimates for the proposed collections of information, suggesting that our estimates were too low because compliance professionals estimated it would take 80–500 hours to prepare, deliver, and file the relationship summary, depending on the firm’s size and business model.1350 Others commented more broadly that the implementation costs of the relationship summary would be higher than we estimated in the Proposing Release.1351 We have considered these comments and are increasing our PRA burden estimates from 15 hours to 40 hours for broker-dealers to prepare and file the relationship summary. We also modified several substantive requirements to mitigate some of these estimated increased costs relative to the proposal. 1. Respondents: Broker-Dealers The respondents to this information collection will be the broker-dealers registered with the Commission that will be required to prepare, file, and deliver a relationship summary in accordance with new rule 17a–14 under the Exchange Act [17 CFR 240.17a–14]. As of December 31, 2018, there were 2,766 broker-dealers registered with the Commission that reported sales to retail customer investors,1352 and therefore likely will be required to prepare and deliver the relationship summary.1353 We also note that these include 318 broker-dealers that are dually registered as investment advisers.1354 We did not receive comments related to the methodology used for estimating the number of broker-dealers that will be subject to these requirements. We are maintaining the methodology we used in the Proposing Release and are updating our estimates to reflect the 1350 See NSCP Letter. commenters argued that the cost to implement Form CRS and Regulation Best Interest would be high. See, e.g., Raymond James Letter; CCMC Letter (investor polling results); SIFMA Letter. 1352 See supra footnote 867 and accompanying text. Retail sales activity is identified from Form BR (see supra footnote 861, 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 believe that many firms will just mark ‘‘sales’’ if they have both retail and institutional activity. However, this may capture some broker-dealers that do not have retail activity, although we are unable to estimate that frequency. 1353 For purposes of Form CRS, a ‘‘retail investor’’ will be defined as: a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes. 1354 See supra footnote 863 and accompanying text. 1351 Some E:\FR\FM\12JYR2.SGM 12JYR2 33614 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations number of broker-dealers since the last burden estimate. Some of 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 amendments to Form ADV and new rule 204–5, discussed in Sections V.A.2.a and V. C.2 above. However, dually registered brokerdealers 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 using both IARD and Web CRD®, and to deliver to both investment advisory clients and brokerage customers, to the extent those groups of retail investors do not overlap. In addition, dual registrants may provide different services, charge different fees, and have different conflicts on the advisory and brokerdealer sides such that the burden of preparing the relationship summary on the broker-dealer side may not be substantially reflected in the burden for preparing the relationship summary on the advisory side. Therefore, although treating dually registered broker-dealers in this way may be over-inclusive, we base our burden estimates for rule 17a– 14 and the relationship summary on 2,766 broker-dealers with relationship summary obligations, including those dually registered as broker-dealers. 1355 2. Initial and Annual Burdens jbell on DSK3GLQ082PROD with RULES2 a. Initial Preparation, Filing, and Posting of Relationship Summary As discussed above in Section II, firms will be required to prepare and file a relationship summary summarizing specific aspects of their brokerage services that they offer to retail investors. Unlike investment advisers, which already prepare Form ADV Part 2A brochures and have information readily available to prepare the relationship summary, brokerdealers will be required for the first time to prepare a disclosure that contains all the information required by the relationship summary. In the Proposing Release, we estimated that the initial first year burden for preparing and filing the 1355 The burden estimates for dual registrants to prepare and file the relationship summary is accounted for in the burden estimates for Form ADV and under Exchange Act rule 17a–14. For example, a dual registrant that prepares an initial relationship summary that covers both its advisory business and broker-dealer business has an estimated burden of 60 hours amortized (20 hours to prepare and file relationship summary related to the advisory business + 40 hours to prepare and file relationship summary related to the broker-dealer business). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 relationship summary for broker-dealers would be 15 hours per registered brokerdealer and an additional 0.5 hours to prepare the relationship summary for posting on its website, if it has one. Several commenters said that our estimated burdens were too low.1356 One commenter specifically argued that preparing, delivering, and filing the relationship summary would take from 80 to 500 hours, based on input from compliance professionals, and noted there would be additional costs that are hard to quantify, including human relations and information technology programming.1357 Commenters also said the relationship summary would result in additional compliance burdens, including training.1358 We are revising our estimate of the time that it would take each brokerdealer to prepare and file the relationship summary in the first year from 15 to 40 hours in light of these comments and the changes we are making to the proposed relationship summary. For example, in the Proposing Release, we estimated that it would take firms a shorter amount of time to prepare the relationship summary than a more narrative disclosure due to the standardized nature and prescribed language of the relationship summary. As discussed above, the final instructions require less prescribed wording relative to the proposal and require broker-dealers to draft their own summaries for most of the sections. In addition and in a change from the proposal, we now are requiring that all relationship summaries be filed with machine-readable headings, as well as text-searchable format as proposed. We acknowledge that these changes will increase cost burdens relative to the proposal because broker-dealers have to develop their own wording and design, as well as implement machine-readable headings to comply with these requirements. The relationship summary will also require more layered disclosures relative to the proposal and will encourage the use of electronic 1356 See, e.g., NSCP Letter; see also CCMC Letter (costs to implement the proposal were underestimated and greater than 40% of firms surveyed anticipate having to spend a moderate or substantial amount to implement Regulation Best Interest and Form CRS); Raymond James Letter (noting the significant implementation costs of Regulation Best Interest and Form CRS for the industry); SIFMA Letter (stating that implementation costs of Regulation Best Interest and Form CRS would be significant). 1357 See NSCP Letter. 1358 See NSCP Letter (stating that a minimum of two hours of firm level training or two hours of training per independent registered representative or adviser will be required prior to Form CRS implementation). PO 00000 Frm 00298 Fmt 4701 Sfmt 4700 formatting and graphical, text, online features to facilitate access to other disclosures that provide additional detail. Although broker-dealers are currently required to disclose certain information about their services and accounts to their retail investors,1359 broker-dealers are not currently 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 comparable to investment advisers’ Form ADV Part 2A. Broker-dealers will bear the cost of drafting a new relationship summary and crossreferencing or hyperlinking to additional information. The higher estimated burden estimate also reflects our acknowledgement that it will take firms longer to draft certain disclosures than we estimated in the Proposing Release, such as answers to ‘‘conversation starters’’ that brokerdealers providing services only online without a particular individual with whom a retail investor can discuss these questions must include on their website. We believe these factors and the changes we made to the proposal will increase the burden to prepare a relationship summary relative to the proposal. We are also changing the filing system for broker-dealers as compared to the proposal. Broker-dealers will file Form CRS through Web CRD® instead of EDGAR as proposed, but we believe that this change will reduce the estimated burden for filing with the Commission, relative to the proposal. Broker-dealers already submit registration filings on Web CRD® so they will not incur additional costs to access the system.1360 We are estimating the same hourly burden for standalone broker-dealers and broker-dealers that are dually registered as investment advisers because we are counting dually registered firms in the burden calculation for the Advisers Act rule that requires the relationship summary for investment advisers.1361 We recognize that the burden for some broker-dealers will exceed our estimate and the burden for others will be less because broker-dealers vary in the size 1359 See, e.g., 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). 1360 This reduction in the filing burden is offset by the increased burden to prepare the relationship summary, resulting in a higher total burden. 1361 See supra footnote 1220. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 and complexity of their business models, but we do not believe that the range could be as high as suggested by some commenters.1362 Unlike investment advisers, which already prepare Form ADV Part 2A brochures and have information readily available to prepare the relationship summary, broker-dealers will be required for the first time to prepare disclosure that contains all the information required by the relationship summary. We recognize that the burden on some broker-dealers might be significant, especially in the initial preparation and filing of the relationship summary and thus will require additional burdens than what we estimated in the Proposing Release. Accordingly, we are increasing the estimate from 15 to 40 hours in the first year for a brokerdealer’s initial preparation and filing of the relationship summary, which is higher than the estimated burden for investment advisers.1363 We estimate that the total burden for broker-dealers to prepare and file the relationship summary will be 110,640 hours,1364 for a monetized value of $30,204,720.1365 The initial burden will be amortized over three years to arrive at an annual burden for broker-dealers to prepare and file the relationship summary. Therefore, the total annual aggregate hour burden for registered brokerdealers to prepare and file the relationship summary will be 36,880 hours, or 13.33 hours per brokerdealer,1366 for an annual monetized cost of $10,068,240, or $3,640 per brokerdealer.1367 As proposed, broker-dealers will be required to post a current version of their relationship summary prominently 1362 See NSCP Letter (estimating that the time required to prepare, deliver, and file Form CRS would be anywhere from 80 to 500 hours). 1363 See infra footnote 1366. Amortizing the 40 hour burden imposed by the relationship summary over a three-year period will result in an average annual burden of 13.33 hours per year for each of the 2,766 broker-dealers with relationship summary obligations. 1364 2,766 × 40.0 hours/3 = 36,880 total hours. 1365 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 $237 and $309 per hour, respectively. (0.5 × 110,640 hours × $237) + (0.5 × 110,640 hours × $309) = $30,204,720. 1366 110,640 hours for preparing and filing/3 years = 36,880 total aggregate annual hour burden to prepare and file relationship summary. 36,880 hours/2,766 broker-dealers with retail accounts = 13.33 hours annually per broker-dealer. 1367 $30,204,720 total initial aggregate monetized cost for preparation and filing/3 = $10,068,240 total annual monetized cost for preparation and filing the relationship summary. $10,068,240/2,766 brokerdealers subject to relationship summary obligations = $3,640 per broker-dealer. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 on their public website (if they have one). In the Proposing Release, we estimated that each broker-dealer will incur 0.5 hours to prepare the posted relationship summary, such as to ensure proper electronic formatting and to post a current version of the relationship summary on the broker-dealer’s website, if it has one. Although we did not receive any comments regarding burdens associated with posting of the relationship summary to a public website, we are increasing our estimate of the time from 0.5 to 1.5 hours based upon the staff’s experience.1368 We believe that the amount of time needed to prepare the relationship summary for posting, including ensuring proper formatting and posting it on the website, will not vary significantly from the time needed by investment advisers. We do not anticipate that broker-dealers will incur additional external costs to post the relationship summary to the brokerdealer’s website because broker-dealers without a public website will not be required to establish or maintain one, and broker-dealers with a public website have already incurred external costs to create and maintain their websites. As with investment advisers, we estimate that each broker-dealer will incur 1.5 hours to prepare the relationship summary for posting to its website. We estimate that the initial burden of posting the relationship summary to their websites, if they have one, will be 4,149 hours,1369 for a monetized value of $257,238.1370 The initial burden will be amortized over three years to arrive at an annual burden for broker-dealers to post the relationship summary to a public website. Therefore, the total annual aggregate hour burden for broker-dealers to post the relationship summary will be 1,383 hours, or 0.5 hours per brokerdealer,1371 for an annual monetized cost of $87,746, or $31 per broker-dealer.1372 supra footnote 1302. hours × 2,766 broker-dealers = 4,149 hours to prepare and post relationship summary to the website. 1370 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 $62 per hour. 4,149 hours × $62 = $257,238 total aggregate monetized cost. 1371 4,149 hours for posting to website/3 years = 1,383 total aggregate annual burden to prepare and file relationship summary. 1,383 hours/2,766 broker-dealers with retail account = 0.5 hours annually per broker-dealer. 1372 $257,238 total initial aggregate monetized cost for posting to website/3 = $85,746 total annual monetized cost for posting the relationship summary. $87,746/2,766 broker-dealers with retail accounts = $31 per broker-dealer. PO 00000 1368 See 1369 1.5 Frm 00299 Fmt 4701 Sfmt 4700 33615 To arrive at an annual burden for preparing, filing, and posting the relationship summary, as for investment advisers, the initial burden will be amortized over a three-year period for broker-dealers. 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, will be 38,263 hours, or 13.83 hours per brokerdealer,1373 for an annual monetized cost of $10,153,986, or $3,671 per brokerdealer.1374 b. Estimated External Costs for Initial Preparation of Relationship Summary Under new rule 17a–14, brokerdealers will 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 to broker-dealers in the form of website set-up, maintenance, or licensing fees because they will 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 most broker-dealers will incur a one-time initial cost for outside legal and consulting fees in connection with the initial preparation of the relationship summary. We estimated in the Proposing Release that an external service provider would spend 3 hours helping a brokerdealer prepare an initial relationship summary. While we received no specific comments on our estimate regarding external costs in the Proposing Release, one commenter suggested that there would be additional implementation costs such as legal advice, but that these costs are difficult to quantify.1375 Based on the concerns expressed by this commenter and the changes we are making to the relationship summary, for example, requiring less prescribed wording, we are increasing the estimate relative to the proposal from 3 to 5 hours. 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 1373 110,640 hours for preparing and filing + 4,149 hours for posting = 114,789 hours. 114,789/ 3 years = 38,263 total aggregate annual hour burden to prepare and file relationship summary. 38,263 hours/2,766 broker-dealers with retail accounts = 13.83 hours annually per broker-dealer. 1374 $30,204,720 total initial aggregate monetized cost for preparation and filing + $257,238 for posting to the website/3 = $10,153,986 total annual monetized cost for preparation, filing and posting the relationship summary. $10,153,968/2,766 broker-dealers subject to relationship summary obligations = $3,671 per broker-dealer. 1375 See NSCP Letter. E:\FR\FM\12JYR2.SGM 12JYR2 33616 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations the industry purposes of the PRA analysis, particularly given our experience with the burdens for Form ADV.1376 Although broker-dealers that will be subject to the relationship summary requirement may vary widely in terms of the size, complexity, and nature of their business, we believe that the strict page limits will make it unlikely that the amount of time, and thus cost, required for outside legal and compliance review will vary substantially among those brokerdealers who elect to obtain outside assistance. Most of the information required in the relationship summary is readily available to broker-dealers because the information required pertains largely to the broker-dealer’s own business practices, and thus the information is likely more readily available to the broker-dealer than to an external legal or compliance consultant. However, because broker-dealers are drafting a narrative disclosure for the first time, we anticipate that 50% of broker-dealers will seek the help of outside legal services and 50% of broker-dealers 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 will be $2,485.1377 We estimate that the initial per broker-dealer cost for compliance consulting services related to the preparation of the relationship summary will be $3,705.1378 Accordingly, we estimate that 1,383 broker-dealers will use outside legal services, for a total initial aggregate cost burden of $3,436,755,1379 and 1,383 broker-dealers will use outside compliance consulting services, for a total initial aggregate cost 1376 See supra footnote 1221. legal 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 legal services cost approximately $497 per hour. $497 per hour for legal services × 5 hours per broker-dealer = $2,485. The hourly cost estimate of $497 is adjusted for inflation and based on our consultation with broker-dealers and law firms who regularly assist them in compliance matters. 1378 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 $741 per hour. $741 per hour for outside consulting services × 5 hours per broker-dealer = $3,705. 1379 50% × 2,766 SEC registered broker-dealers = 1,383 broker-dealers. $2,485 for legal services × 1,383 broker-dealers = $3,436,755. jbell on DSK3GLQ082PROD with RULES2 1377 External VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 burden of $5,124,015,1380 resulting in a total initial aggregate cost burden among all respondents of $8,560,770, or $3,095 per broker-dealer, for outside legal and compliance consulting fees related to preparation of the relationship summary.1381 Annually, this represents $2,853,590, or $1,032 per broker-dealer, when amortized over a three-year period.1382 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. In the Proposing Release, we estimated that broker-dealers required to prepare and file a relationship summary would require 0.5 hours to amend and file the updated relationship summary, and 0.5 hours to post it to their website. We did not receive comments regarding hour burdens associated with preparing and filing amendments to the relationship summary. As discussed in section II.C.4 above, in a change from the proposal, we are adding a requirement that broker-dealers delivering updated relationship summaries to customers also highlight the most recent changes by, for example, marking the revised text or including a summary of material changes. To account for this change, we are increasing the annual burden to 1 hour per year for preparing and filing amendments to the relationship summary. We are not changing the proposed 0.5 hours estimate to post the amendments to a public website. Based on staff experience, we believe that many broker-dealers will update their relationship summary at a minimum once a year, after conducting an annual supervisory review, for example.1383 We also estimate that on average, each broker-dealer preparing a relationship summary may amend the 1380 50% × 2,766 SEC registered broker-dealers = 1,383 broker-dealers. $3,705 for compliance consulting services × 1,383 broker-dealers = $5,124,015. 1381 $3,436,755 + $5,124,015 = $8,560,770. $8,560,770/2,766 broker-dealers = $3,095 per broker-dealer. 1382 $8,560,770 initial aggregate monetized cost/3 years = $2,853,590 annually. $3,095 initial monetized cost per broker-dealer/3 years = $1,032. 1383 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). PO 00000 Frm 00300 Fmt 4701 Sfmt 4700 disclosure once more during the year, due to emerging issues. Therefore, we estimate that broker-dealers will update their relationship summary, on average, twice a year. Thus, we estimate that broker-dealers will incur a total annual aggregate hourly burden of 5,532 hours per year to prepare and file amendments per year, and 2,766 hours per year to post to their websites an estimated total of 5,532 amendments per year.1384 We therefore estimate that for making and filing amendments to their relationship summaries, broker-dealers will incur an annual aggregate monetized cost of $1,510,236, or approximately $546 per broker-dealer to prepare and file amendments,1385 and an annual aggregate monetized cost of $171,492, or approximately $62 per broker-dealer to post the amendments.1386 In total, the aggregate annual monetized cost for broker-dealers to make, file, and post amendments will be $1,681,728, or approximately $608 per broker dealer.1387 We do not expect ongoing external legal or compliance consulting costs for the relationship summary.1388 Although broker-dealers will be required to amend the relationship summary within 30 days whenever any information becomes materially inaccurate, we expect that the amendments will require relatively minimal wording changes, given the relationship summary’s page limitation and summary nature. We believe that broker-dealers will be more knowledgeable about the information to include in the amendments than outside legal or compliance consultants and will be able to make these revisions inhouse. Therefore, we do not expect that broker-dealers will need to incur ongoing external costs for the 1384 2,766 broker-dealers amending relationship summaries × 2 amendments per year = 5,532 amendments per year. 5,532 amendments × 1 hour to amend and file = 5,532 hours. 2,766 brokerdealers × (0.5 hours to post amendments to website × 2 amendments a year) = 2,766 hours. 1385 5,532 total aggregate initial hour burden for amending relationship summaries. We believe that performance of this function will most likely be equally allocated between a senior compliance examiner and a compliance manager. Data from the SIFMA Management and Professional Earnings Report suggest that costs for these positions are $237 and $309 per hour, respectively. (5,532 hours × 50% × $237 + 5,532 hours × 50% × $309 = $1,510,236. $1,510,236/2,677 investment advisers = $546 per investment broker-dealer. 1386 Based on data from the SIFMA Office Salaries Report, we expect that the posting will most likely be performed by a general clerk at an estimated cost of $62 per hour. 2,766 aggregate hours to post amendment × $62 = $171,492. $171,492/2,766 broker-dealers = $62 in annual monetized costs. 1387 $1,510,236 to prepare and file amendment + $171,492 to post the amendments = $1,681,728. $1,681,728/2,766 = $608. 1388 But see NNCP Letter. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations preparation and review of relationship summary amendments. jbell on DSK3GLQ082PROD with RULES2 d. Delivery of the Relationship Summary Rule 17a–14 under the Exchange Act will 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 earliest of: (i) A recommendation of an account type, a securities transaction or an investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) the opening of a brokerage account for the retail investor. Broker-dealers also will make a onetime, initial delivery of the relationship summary to all existing customers within a specified time period after the effective date of the rule. Also with respect to existing customers, brokerdealers will deliver the most recent relationship summary before or at the time of (i) opening a new account that is different from the retail investor’s existing account(s); or (ii) recommending that the retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) recommending or providing a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in the existing account. As discussed above in Section II.C.3.a, broker-dealers will be required to post a current version of the relationship summary prominently on their public websites (if they have one), and will be required to communicate any changes in an amended relationship summary to retail investors who are existing clients or customers within 60 days, instead of 30 days as proposed, after the amendments are required to be made and without charge.1389 Broker-dealers also must deliver a current relationship summary to each retail investor within 30 days upon request. In a change from the proposal, a broker-dealer must make available a copy of the relationship summary upon request without charge, and where a relationship summary is delivered in paper format, the brokerdealer may link to additional information by including URL addresses, QR codes, or other means of facilitating access to such information.1390 The broker-dealer must 1389 The communication can be made by delivering the relationship summary or by communicating the information through another disclosure that is delivered to the retail investor. 1390 Additionally, we are adopting the instruction that if a relationship summary is delivered in paper format as part of a package of documents, the firm VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 also include a telephone number where retail investors can request up-to-date information and request a copy of the relationship summary.1391 As discussed further below, we received comments that our estimated burdens for delivery of the relationship summary were too low.1392 Some of these comments were focused on the delivery burdens related to the requirement to deliver a relationship summary to existing retail investors when changes are made to the existing account that would ‘‘materially change’’ the nature and scope of the relationship.1393 Other comments focused on the recordkeeping burdens related to the requirement to deliver the relationship summary to a new or prospective retail investor.1394 As discussed further below, we made changes to the proposal to require more specific triggers for initial delivery and additional delivery to existing customers in order to replace the requirements in response to comments. We discuss below the specific separate delivery requirements and modifications. (1) 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 2,766 brokerdealers that report retail activity have approximately 139 million customer accounts, and that approximately 73.5%, or 102.165 million, of those accounts belong to retail customers.1395 We estimate that, under the adopted rule, broker-dealers will send their relationship summary along with other must ensure that the relationship summary is the first among any documents that are delivered at that time, substantially as proposed. See supra footnotes 678–679. 1391 This differs from the proposal, which required only firms that do not have a public website to include a toll-free number that retail investors may call to request documents. See supra footnote 609. 1392 See, e.g., SIFMA Letter. 1393 See, e.g., Cambridge Letter; SIFMA Letter; LPL Financial Letter. 1394 See infra footnote 1427. 1395 See supra footnotes 857–865 and accompanying text. 2,766 broker-dealers (including dually registered firms) report 139 million customer accounts. Approximately 73.5% of registered broker-dealers report retail customer activity; see supra footnote 861. Therefore, 73.5% × 139 million accounts = 102.165 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. PO 00000 Frm 00301 Fmt 4701 Sfmt 4700 33617 required disclosures, such as periodic account statements, in order to comply with initial delivery requirements for the relationship summary. As with investment advisers, we estimate that a broker-dealer will require no more than 0.02 hours to deliver the relationship summary to each existing retail investor under rule 17a–14. We did not receive comments on the burdens specific to delivering the relationship summary to existing clients. We will therefore estimate broker-dealers to incur an aggregate initial burden of 2,043,300 hours, or approximately 739 hours per brokerdealer for the first year after the rule is in effect.1396 We expect the aggregate monetized cost for broker-dealers to make a one-time initial delivery of relationship summaries to existing customers to be $126,684,600.1397 Amortized over three years, the total annual hourly burden is estimated to be 681,100 hours, or approximately 246 hours per broker-dealer,1398 with annual monetized costs of $42,228,200 and $15,267, respectively.1399 We do not expect that broker-dealers will incur external costs for the initial delivery of the relationship summary to existing clients because we estimate that they will make such deliveries along with another required delivery, such as periodic account statements. (2) Additional Delivery to Existing Customers As discussed in Section II.C.3.c above, broker-dealers will be required to deliver the relationship summary to existing customers when opening a new account that is different from the retail investor’s existing account(s), as proposed. In addition, in a change from the proposal, delivery will be required before or at the time the broker-dealer (i) 1396 (0.02 hours per customer account × 102.165 million customer accounts) = 2,043,300 hours. The burden for preparing updated relationship summaries is already incorporated into the burden estimate for Form CRS discussed above. 2,043,300 hours/2,766 broker-dealers = approximately 739 hours per broker-dealer. 1397 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 $62 per hour. 2,043,300 hours × $62 = $126,684,600. We estimate that broker-dealers will not incur any incremental postage costs because we estimate that they will make such deliveries with another mailing the broker-dealer was already delivering to clients, such as periodic account statements. 1398 2,043,300 initial aggregate hours/3 = 681,100 total annual aggregate hours. 739 initial hours per broker-dealer/3 = 246 total annual hours per brokerdealer. 1399 $126,684,600 initial aggregate monetized cost/3 = $42,228,200 annual aggregate monetized cost. $42,228,200/2,766 broker-dealers = $15,267 annual monetized cost per broker-dealer. E:\FR\FM\12JYR2.SGM 12JYR2 33618 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 recommends that the retail investor roll over assets from a retirement account into a new or existing account or investment, or (ii) recommends or provides a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in the existing account. We are adopting these two triggers instead of the proposed requirement to deliver the relationship summary before or at the time changes are made to the existing account that would ‘‘materially change’’ the nature and scope of the relationship to address commenters’ requests for additional guidance or examples of what would constitute a ‘‘material change.’’ 1400 Commenters also described administrative and operational burdens arising from this requirement and argued that our estimated burdens were too low.1401 One commenter asserted that firms would be required to build entirely new operational and supervisory processes to identify asset movements that could trigger a delivery requirement.1402 Another noted the challenges of designing a system that distinguishes non-ordinary course events from routine account changes.1403 As discussed above, we replaced the ‘‘materially change’’ requirement with more specific triggers to be clearer about when a relationship summary must be delivered.1404 While these specific triggers will still impose operational and supervisory burdens on broker-dealers, we believe that they are more easily identified and monitored, such that firms will not incur significant burdens as described by commenters to implement entirely new supervisory, administrative, and operational processes needed to monitor events that cause a material change. However, recognizing that some additional processes will be necessary to implement these delivery triggers, we are increasing our burden estimate from 0.02 to 0.04 hours. We now estimate that each broker-dealer will incur 149 hours per year to deliver the relationship summary in these types of situations, and that delivery under these circumstances will take place among 10% of broker-dealer’s retail investors annually. We will therefore estimate 1400 See supra footnotes 758–763 and accompanying text. 1401 See, e.g., LPL Financial Letter (stating that proposed re-delivery triggering events would not be easily identifiable and would present operational challenges and compliance costs). 1402 See SIFMA Letter. 1403 See LPL Financial Letter. 1404 See supra footnote 761 and accompanying text. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 broker-dealers to incur a total annual aggregate burden of 408,660 hours, or 148 hours per broker-dealer,1405 at an annual aggregate monetized cost of $25,336,920, or approximately $9,160 per broker-dealer.1406 (3) Communicating Changes to Amended Relationship Summaries, Including by Delivery As discussed above, broker-dealers will be required to amend their relationship summaries within 30 days when any of the information becomes materially inaccurate. They must also communicate any changes in any new version of the relationship summary to retail investors who are existing customers within 60 days, instead of 30 days as proposed, after the updates are required to be made and without charge. We do not expect this change to increase the PRA estimates.1407 The communication can be made by delivering the relationship summary or by communicating the information through another disclosure to the retail investor. This requirement is a change from the proposed requirement but is substantively similar, and commenters did not comment on the estimated burden.1408 We have determined not to change the burden relative to the proposal. Consistent with our discussion on broker-dealers’ amendments to the 1405 10% of 102.165 million customers × 0.04 hours = 408,660 hours. 408,660 hours/2,766 brokerdealers = 148 hours per broker-dealer. 1406 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 $62 per hour. 408,660 hours × $62 = $25,336,920. $25,336,920/2,766 brokerdealers = $9,160 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 estimate 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. 1407 As discussed in Section V.D.2.c., we have increased the burden estimates for preparing amendments to the relationship summary, acknowledging, among other things, that firms will incur additional burdens to prepare and file amendments as a result of the instructions that firms preparing amendments highlight the most recent changes, and that additional disclosure showing the revised text be attached as an exhibit to the unmarked relationship summary. 1408 The proposed instructions would have required firms to communicate updated information by delivering the amended relationship summary or by communicating the information another way. The revised instruction will eliminate the wording ‘‘another way’’ and will clarify that the communication can be made through another disclosure that is delivered to the retail investor. See supra footnotes 775–778 and accompanying text. PO 00000 Frm 00302 Fmt 4701 Sfmt 4700 relationship summary we are assuming that the broker-dealers with relationship summaries will amend them twice each year. We also estimate that 50% will choose to deliver the relationship summary to communicate the updated information. We did not receive comments on this estimate. As with investment advisers, we believe that it is likely that the other 50% of brokerdealers will incorporate all of the updated information in other disclosures, which they are already obligated to deliver in order to avoid having to deliver two documents. We estimate that broker-dealers will require 0.02 hours to make a delivery to each customer.1409 Therefore, the estimated burden for those broker-dealers choosing to deliver an amended relationship summary to meet this communication requirement will be approximately 2,043,300 hours, or 739 hours per broker-dealer,1410 translating into a monetized cost of $126,684,600 in aggregate, or $45,801 per brokerdealer.1411 In a change from the proposal, we are also adopting two requirements not included in the proposal. First, all firms will be required to make available a copy of the relationship summary upon request without charge. Second, in a relationship summary that is delivered in paper format, firms may link to additional information by including URL addresses, QR codes, or other means of facilitating access to such information. We believe that these new requirements will increase the burden relative to the proposal for some brokerdealers that do not currently fulfill these types of disclosure requests, including, for example, additional costs associated with tracking customer delivery 1409 For the other 50% of broker-dealers that may choose to communicate updated information in another disclosure, we estimate no added burden because these broker-dealers are communicating the information in other disclosures they are already delivering. 1410 2 amendments per year × 102.165 million customer accounts × 50% delivering the amended relationship summary to communicate updated information × 0.02 hours per delivery = 2,043,300 hours to deliver amended relationship summaries. 2,043,300 hours/2,766 broker-dealers = 739 hours per broker-dealer. 1411 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 $62 per hour. 2,043,300 hours × $62 = $126,684,600. $126,684,600/2,766 brokerdealers = $45,801 per broker-dealer. We estimate that broker-dealers will not incur any incremental postage costs to deliver these relationship summaries, because we estimate that advisers will make the delivery along with other documentation they normally would provide, such as account opening documents. E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations preferences related to making copies of the relationship summary available upon request, and printing and mailing costs for copies delivered in paper. We estimate that the 2,766 broker-dealers with relationship summary obligations, on average, will require 0.5 hours each annually to comply with this requirement. Therefore, we estimate that the 2,766 broker-dealers with relationship summary obligations will incur a total of 1,383 aggregate burden hours to make copies of the relationship summary available upon request,1412 with a monetized cost per adviser of $31, or $85,746 in aggregate monetized cost.1413 We acknowledge that the burden may be more or less than 0.5 hours for some broker-dealers, but we believe that, on average, 0.5 hours is an appropriate estimate for calculating an aggregate burden for the industry for this collection of information. We do not expect broker-dealers to incur external costs in delivering amended relationship summaries or communicating the information in another way because we estimate that they will make these deliveries with, or as part of other disclosures required to be delivered. We did not receive comments on this assumption in the proposal. jbell on DSK3GLQ082PROD with RULES2 e. Delivery to New Customers or Prospective New Customers To estimate the delivery burden for broker-dealers’ new or prospective new customers, as discussed above, we estimate that the 2,766 standalone broker-dealers with retail activity have approximately 102.165 million retail customer accounts.1414 We did not receive comments on the burdens specific to delivering the relationship summary to new and prospective retail investors under rule 17a–14. 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, 11% more new retail investors each year.1415 We 1412 0.5 hours to make paper copies of the relationship summary available upon request × 2,677 broker-dealers with relationship summary obligations = 1,383 hours. 1413 Based on data from the SIFMA Office Salaries Report, we expect that the requirement for brokerdealers to make paper copies of the relationship summary available upon request will most likely be performed by a general clerk at an estimated cost of $62 per hour. 0.5 hours per broker-dealer × $62 = $31 in monetized costs per broker-dealer. $31 per broker-dealer × 2,766 broker-dealers with relationship summary obligations = $85,746 total aggregate monetized cost. 1414 See supra footnotes 857–865 and accompanying text. 1415 This represents the average annual rate of growth from 2014–2018 in the number of accounts for all broker-dealers reporting retail activity. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 estimate the hour burden for initial delivery of a relationship summary will 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 will be 224,763 hours, or 81.3 hours per broker-dealer,1416 at a monetized cost of $13,935,306 at an aggregate level, or $5,038 per brokerdealer.1417 f. Total New Initial and Annual Burdens As discussed above, we estimate the total annual collection of information burden for 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) additional delivery to existing customers; (v) delivery of amended relationship summaries; (vi) delivery to new and prospective customers; and (vii) making copies available upon request. Given these requirements, we estimate the total annual aggregate hourly burden to be approximately 3,408,533 hours per year, or 1,232 hours on a per broker-dealer basis.1418 This translates into an aggregate annual monetized cost of $219,110,726, or 1416 102.165 million customer accounts × 11% increase = 11,238,150 new customers. 11,238,150 new customers × 0.02 hours per delivery = 224,763 total annual aggregate hours. 224,763/2,766 brokerdealers = 81.3 hours per broker-dealer for delivery to new customers. 1417 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 $62 per hour. 224,763 hours × $62 = $13,935,306. $13,935,306/2,766 broker-dealers = $5,038 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 estimate that broker-dealers will make the delivery along with other documentation, such as periodic account statements. 1418 36,880 hours per year for initial preparation and filing of relationship summary + 4,149 hours for posting to website + 8,298 hours per year for amendments, filing, and posting of amendments + 681,100 hours for one-time initial delivery to existing customers + 408,660 hours for delivery to existing customers making material changes to their accounts + 2,043,300 hours for delivery of amendments + 224,763 hours for delivery to new customers + 1,383 hours to make paper copies available upon demand = 3,408,533 total annual aggregate hours. 3,408,533 hours/2,766 brokerdealers = 1,232 hours per broker-dealer. PO 00000 Frm 00303 Fmt 4701 Sfmt 4700 33619 $79,216 per broker-dealer per year.1419 In addition, we estimate that brokerdealers will incur external legal and compliance costs in the initial preparation of the relationship summary of approximately $8,560,770 in aggregate, or $3,095 per broker-dealer, translating into $2,853,590 annually, or $1,032 per broker-dealer, when amortized over a three year period.1420 E. Recordkeeping Obligations Under Exchange Act Rule 17a–3 1421 The final requirement to make a record indicating the date that a relationship summary was provided to each retail investor, including any relationship summary provided before such retail investor opens an account, will contain a collection of information that will be found at 17 CFR 240.17a– 3(a)(24) and will be mandatory. The Commission staff will use this collection of information in its examination and oversight program, and the information generally is kept confidential.1422 The likely respondents to this collection of information requirement are the approximately 2,766 broker-dealers currently registered with the Commission that offer services to retail investors, as defined above.1423 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.’’ 1424 Exchange Act rules 17a–3 and 17a–4 specify minimum requirements with respect to the records 1419 $10,068,240 per year for initial preparation, filing, and posting of relationship summary + $257,238 per year for posting to website + $514,476 per year for amendments, filing, and posting of amendments + $42,228,200 for one-time initial delivery to existing customers (amortized over three years) + $25,336,920 for delivery to existing customers making material changes to their accounts + $126,684,600 for delivery of amendments + $13,935,306 for delivery to new customers + $85,746 per year to make paper copies of the relationship summary available upon demand = $219,110,726 in total annual aggregate monetized cost. $219,110,726/2,766 broker-dealers = $79,216 per broker-dealer. 1420 $3,436,755 total external legal costs + $5,124,015 total external compliance cost = $8,560,770 total external legal and compliance costs. $8,560,770 total external legal and compliance costs/2,766 broker-dealers = $3,095 per broker-dealer. $8,560,770 total external legal and compliance costs/3 = $2,853,590 annually. $3,095/ 3 = $1,032 per year. 1421 In a concurrent release, we are adopting additional burden adjustments to Exchange Act rules 17a–3 and 17a–4. See Regulation Best Interest Release, supra footnote 47. 1422 See section 24(b) of the Exchange Act. 1423 See supra footnotes 857–865 and accompanying text. 1424 See section 17(a) of the Exchange Act. E:\FR\FM\12JYR2.SGM 12JYR2 33620 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 that broker-dealers must make, and how long those records and other documents must be maintained, respectively. The amendments to Exchange Act rule 17a–3 will require SEC-registered broker-dealers to make a record indicating the date that a relationship summary was provided to each retail investor and to each prospective retail investor who subsequently becomes a retail investor. We are adopting these amendments as proposed. In the Proposing Release, we estimated that the adoption of new paragraph (a)(24) of rule 17a–3 would result in an incremental burden increase of 0.1 hours annually for each of the estimated 2,766 SEC-registered broker-dealers that will be required to record the dates that the initial relationship summary and each new version thereof, is provided to an existing or prospective retail investor.1425 As discussed above in Section II.E, several commenters suggested that our estimated burdens for the relationship summary recordkeeping obligations were too low.1426 Some commenters argued that keeping records of when a relationship summary was given to prospective retail clients would be unnecessarily burdensome or not feasible, and was not adequately considered in the Commission’s burden estimates.1427 One of these commenters said that it would be difficult for firms to integrate pre-relationship delivery 1425 We applied 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. As discussed above, we are increasing our estimates. 1426 See, e.g., CCMC Letter; SIFMA Letter; see also NSCP Letter (estimating 80–500 hours to prepare, deliver, and file Form CRS, including recordkeeping policies and procedures). 1427 See, e.g., CCMC Letter; SIFMA Letter; Committee of Annuity Insurers Letter; Edward Jones Letter. A few others stated that creating recordkeeping policies and procedures relating to how professionals respond to ‘‘key questions’’ would be burdensome and extremely difficult. See, e.g., LPL Financial Letter. Although the final instructions require ‘‘conversation starter’’ questions that are similar to the proposed ‘‘key questions,’’ we are not increasing the burden as urged by commenters. As discussed in Section V.D.2.a. above, we increased the burden estimates for the initial preparation of the relationship summary, acknowledging, among other things, that certain broker-dealers that provide services only online will incur additional burdens to develop written answers to the conversation starters and make those available on their websites with a hyperlink to the appropriate page in the relationship summary for these documents. However, we do not expect these broker-dealers to incur additional recordkeeping burdens under amendments to Exchange Act rule 17a–3 because we are not establishing new or separate recordkeeping obligations related to the conversation starters or the answers provided by firms in response to the conversation starters. See supra footnotes 814–816. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 dates into their operational systems and procedures, and that there is no way to track when a disclosure is accessed on a website.1428 After consideration of comments, and because broker-dealers do not currently maintain similar records like the relationship summary, we are revising our estimate of the time that it would take each broker-dealer to create the records required by new paragraph (a)(24) of rule 17a–3 as adopted from 0.1 hours to 0.5 hours. The incremental hour burden for broker-dealers to create the records required by new paragraph (a)(24) of rule 17a–3 as adopted will therefore be 1,383 hours,1429 for a monetized cost of $87,627 in aggregate, or $32 per broker-dealer.1430 We also do not expect that broker-dealers will incur external costs for the requirement to make records because we believe that broker-dealers will make such records in a manner similar to their current recordkeeping practices, including those that apply to communications and correspondence with retail investors. F. Record Retention Obligations Under Exchange Act Rule 17a–4 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.’’ 1431 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 adopting amendments to rule 17a–4 as proposed that will require brokerdealers to retain copies of each version of the relationship summary provided to current or prospective retail investors, and to preserve the record of dates that each version of the relationship summary was delivered to any existing retail investor or to any new or prospective retail investor customer, pursuant to the new requirements under new paragraph (a)(24) under rule 17a– SIFMA Letter. broker-dealers × 0.5 hours annually = 1,383 annual hours for recordkeeping. 1430 As with our estimates relating to the proposed amendments to Advisers Act rule 204–2 (see, e.g., supra footnote 1284 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 positions are $70 and $62, respectively. (17% × 1,383 hours × $70) + (83% × 1,383 hours × $62) = $87,627. $87,627/2,766 broker-dealers = $32 per broker-dealer. 1431 See section 17(a) of the Exchange Act. PO 00000 1428 See 1429 2,766 Frm 00304 Fmt 4701 Sfmt 4700 3, as adopted, discussed above. These records as well as a copy of each version of a firm’s relationship summary will 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 will be found at 17 CFR 240.17a–4 and will be mandatory. The Commission staff will 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 will facilitate the Commission’s ability to inspect for and enforce compliance with firms’ obligations with respect to the relationship summary. The information generally is kept confidential.1432 The likely respondents to this collection of information requirement are the approximately 2,766 brokerdealers that report retail activity, as described above. We did not receive comments related to burdens associated with record retention obligations for broker-dealers. We do not expect that broker-dealers will incur external costs for the requirement to maintain and preserve a copy of each version of the relationship summary as well as the records required to be made pursuant to new paragraph (a)(24) of Exchange Act rule 17a–3 because broker-dealers are already required to maintain and retain similar records related to communication with retail investors. 1. Changes in Burden Estimates and New Burden Estimates The approved annual aggregate burden for rule 17a–4 is currently 1,042,866 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.1433 The 1432 See section 24(b) of the Exchange Act. 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 Supporting Statement for the Paperwork Reduction Act Information Collection Submission for Rule 17a–4 (Oct. 19, 2016), available at https://www.reginfo.gov/public/do/ DownloadDocument?objectID=68823501 (defining an internal broker-dealer system as ‘‘any facility that provides a mechanism for collecting, receiving, disseminating, or displaying system orders and facilitating agreement to the basic terms of a purchase or sale of a security between a customer and the sponsor, but excludes a national securities exchange, an exchange exempt from registration based on limited volume, and an alternative trading system.’’). 1433 (4,104 E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 currently approved annual reporting and recordkeeping cost estimate to respondents is $20,520,000.1434 We estimate that the adopted amendments will result in an increase in the collection of information burden estimate by 0.10 hour 1435 for each of the estimated 2,766 currently registered broker-dealers that report retail sales activity and will have relationship summary obligations.1436 The incremental hour burden for brokerdealers will therefore be 277 hours,1437 for a monetized cost of $19,390 in aggregate, or $7 per broker-dealer.1438 This will yield an annual estimated aggregate burden of 702,841 hours for all broker-dealers with relationship summary obligations to comply with paragraph (e)(10) of Exchange Act rule 17a-4, as amended,1439 for a monetized cost of approximately $49,198,870.1440 In addition, the 998 broker-dealers not subject to the amendments 1441 will continue to be subject to an unchanged burden of 254 hours per broker-dealer, or 253,492 hours for these brokerdealers.1442 In addition, those maintaining an internal broker-dealer system will continue to be subject to an unchanged burden of 450 hours annually, under paragraph (e)(10) of 1434 4,104 broker-dealers × $5,000 annual recordkeeping cost per broker-dealer = $20,520,000. 1435 In the Proposing Release, we applied the same 0.2 hour estimate as with investment advisers, but divided that burden equally between the rule 17a–3 requirement to create a record of the dates the relationship summary was delivered to current or prospective customers and the rule 17a–4 requirement to maintain those records as well as copies of each version of the relationship summary. As discussed above, we are increasing the burden estimates for the recordkeeping requirement from 0.1 hours to 0.5 hours in light of certain comments, however, we believe, on balance, that 0.1 hour estimate for the record retention requirement is a reasonable estimate for purposes of the PRA analysis. 1436 See supra footnotes 857–865. 1437 2,766 broker-dealers × 0.1 hours annually = 277 annual hours for record retention. 1438 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 $70 per hour. 277 hours × $70 = $19,390. $19,390/2,766 broker-dealers = $7 per broker-dealer. 1439 2,766 broker-dealers required to prepare relationship summary × (254 hours + 0.1 hour) = 702,841 hours. 1440 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 $70 per hour. 702,841 hours × $70 = $49,198,870. 1441 See supra footnotes 858–863 and accompanying text. 1442 998 broker-dealers × 254 hours = 253,492 hours for broker-dealers not preparing a relationship summary. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 Exchange Act rule 17a–4, as amended. In summary, taking into account the estimated annual burden of brokerdealers that will 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 956,783 total annual aggregate hours,1443 for a monetized cost of approximately $66,974,810 million.1444 2. Revised Annual Burden Estimates As noted above, the approved annual aggregate burden for rule 17a–4 is currently 1,042,866 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 will be 956,783 1445 hours, represented by a monetized cost of approximately $66,974,810 million,1446 based on an estimate of 2,766 broker-dealers with the relationship summary obligation and 998 broker-dealers without, as noted above. This represents a decrease of 85,6331447 annual aggregate hours in the hour burden and an annual decrease of approximately $811,480 from the currently approved total aggregate monetized cost for rule 17a–4.1448 These changes are attributable to the amendments to rule 17a–4 relating to the relationship summary as discussed in this release and the decline in the number of registered broker-dealer respondents. The revised annual reporting and recordkeeping cost to respondents is estimated at approximately $18,820,000, or a reduction of $1,700,000 million from the currently approved annual reporting and recordkeeping cost burden of $20,520,000.1449 1443 702,841 + 253,492 + 450 = 956,783 total aggregate hours. 1444 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 $70 per hour. 956,783 hours × $70 = $66,974,810. 1445 See supra footnote 1443. 1446 See supra footnote 1444. 1447 1,042,416 hours ¥ 956,783 hours = 85,633 hours. 1448 $67,786,290 ¥ $66,974,810 = $811,480. 1449 3,764 registered broker-dealers as of December 31, 2018 × $5,000 per broker-dealer in record maintenance costs = $18,820,000. $20,520,000 ¥ $18,820,000 = $1,700,000. PO 00000 Frm 00305 Fmt 4701 Sfmt 4700 33621 VI. Final Regulatory Flexibility Analysis The Commission has prepared the following Final Regulatory Flexibility Analysis (‘‘FRFA’’) in accordance with section 4(a) of the Regulatory Flexibility Act.1450 It relates to: (i) New rule 204– 5 under the Advisers Act and amendment to Form ADV (17 CFR 279.1), to add a new Part 3: Form CRS (relationship summary); (ii) amendments to rule 203–1 under the Advisers Act; (iii) amendments to rule 204–1 under the Advisers Act; (iv) amendments to rule 204–2 under the Advisers Act; (v) new rule 17a–14 under the Exchange Act and new Form CRS (17 CFR 249.640) (relationship summary); and (vi) amendments to rules 17a–3 and 17a–4 under the Exchange Act.1451 We prepared an Initial Regulatory Flexibility Analysis (‘‘IRFA’’) in the Proposing Release.1452 A. Need for and Objectives of the Amendments Broker-dealers, investment advisers, and dually registered firms all provide important services for retail investors. As discussed above in Sections I and IV, research continues to show that retail investors are confused about services, fees, conflicts of interest, and the required standard of conduct for particular firms as well as the differences between broker-dealers and investment advisers. Lack of knowledge about important aspects of the market for financial advice, such as the services, fees, conflicts of interest, and the required standard of conduct for particular firms may harm retail investors by deterring them from seeking brokerage or investment advisory services even if they could potentially benefit from them, or by increasing the risk of a mismatch between the investors’ preferences and expectations and the actual brokerage or advisory services they receive. Therefore, it is important to reduce retail investor confusion in the marketplace for brokerage and investment advisory services and to assist retail investors with the process of deciding whether to (i) establish an 1450 5 U.S.C. 604(a). Commission is also amending 17 CFR 200.800 to display the control number assigned to information collection requirements for ‘‘Form CRS and rule 17a–14 under the Exchange Act’’ by OMB pursuant to the PRA. Because the Commission is not publishing the amendments to 17 CFR 200.800 in a notice of proposed rulemaking, no analysis is required under the Regulatory Flexibility Act. (See 5 U.S.C. 601(2) (for purposes of the Regulatory Flexibility Act, the term ‘‘rule’’ means any rule for which the agency publishes a general notice of proposed rulemaking).) 1452 See Proposing Release, supra footnote 5. 1451 The E:\FR\FM\12JYR2.SGM 12JYR2 jbell on DSK3GLQ082PROD with RULES2 33622 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations investment advisory or brokerage relationship, (ii) engage a particular firm or financial professional, or (iii) terminate or switch a relationship or specific service. Moreover, it is important to ensure that retail investors receive the information they need to clearly understand the relationships and services a firm offers, as well as the fees, costs, conflicts, standard of conduct, and disciplinary history of firms and financial professionals they are considering, and where to find additional information, to ameliorate this potential harm. As discussed above in Section I above, the Commission considered ways to address retail investor confusion and engaged in broad outreach to investors and other market participants to solicit feedback on the proposal, including comment letters, a ‘‘feedback form,’’ investor roundtables, and RAND investor testing. After carefully considering the comments we received, we are adopting disclosure requirements that are designed to ameliorate the potential harm of retail investor confusion and to assist retail investors with the process of deciding whether to (i) establish an investment advisory or brokerage relationship, (ii) engage a particular firm or financial professional, or (iii) terminate or switch a relationship or specific service. As discussed in Section II above, we are adopting new rules and rule amendments to require broker-dealers and investment advisers to deliver a relationship summary to retail investors. The relationship summary will be short with narrative information presented in a prescribed order with the following sections: (i) Introduction; (ii) relationships and services; (iii) fees, costs, conflicts, and standard of conduct; (iv) disciplinary history; and (v) where to find additional information. As discussed in Section II.C.3.c above, the relationship summary will be in addition to, and not in lieu of, current disclosure and reporting requirements for broker-dealers and investment advisers. To promote effective communication, firms will be required to write their relationship summary in plain English and they are encouraged to use charts, graphs, tables, and other graphics or text features to respond to the required disclosures. We are limiting the length of the relationship summary to keep the disclosures focused.1453 The purpose of 1453 Specifically, the relationship summary for standalone broker-dealers and standalone investment advisers must not exceed two pages in paper format (or equivalent in electronic format). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 the relationship summary is to summarize information about a particular broker-dealer or investment adviser in a format that allows for comparability among firms, encourages retail investors to ask questions, and highlights additional sources of information. As discussed in Section II above, we are adopting filing, delivery, and updating requirements for the relationship summary. We also are adopting amendments to the recordkeeping requirements under the Advisers Act rule 204–2 and Exchange Act rules 17a–3 and 17a–4 to address the new relationship summary.1454 All of these requirements are discussed in detail in Section II above. The costs and burdens of these requirements on small advisers and small broker-dealers are discussed below as well as above in our Economic Analysis and Paperwork Reduction Act Analysis, which discuss the costs and burdens on all investment advisers and broker-dealers.1455 B. Significant Issues Raised by Public Comments The Commission is sensitive to the burdens that the new rules and rule amendments may have on small entities. In the Proposing Release, we requested comment on matters discussed in the IRFA. In particular, we sought comments on the number of small entities subject to the new relationship summary, and the new rules and rule amendments as well as the potential impacts on small entities. We sought comments on whether the proposal could have an effect on small entities that had not been considered. We also requested that commenters describe the nature of any impact on small entities and provide empirical data to support the extent of such impact. The Commission did not receive comments specifically addressing the IRFA. However, as discussed in the Economic Analysis and Paperwork Reduction Act Analysis above, we received comments regarding the potential costs and burdens of the proposal on investment advisers and broker-dealers, including those that are small entities.1456 Dual registrants will have the flexibility to decide whether to prepare separate or combined relationship summaries. For dual registrants that prepare combined relationship summaries, they must not exceed four pages in paper format (or equivalent in electronic format). 1454 17 CFR 275.204–2; 17 CFR 240.17a–3; 17 CFR 240.17a–4. 1455 See supra Sections IV and V. 1456 See supra Sections IV.D.2 and V. PO 00000 Frm 00306 Fmt 4701 Sfmt 4700 With regard to comment letters addressing small firms in particular, the Commission received comment letters concerning the impact of ongoing delivery requirements on small firms.1457 As discussed in Sections II.C.3.c and II.C.4, firms must comply with ongoing delivery requirements to (i) particular retail investors under certain circumstances 1458 and (ii) all retail investors who are existing clients or customers when a relationship summary is updated. The commenters appeared to be discussing both types of ongoing delivery requirements. Specifically, a commenter stated that to comply with ongoing delivery requirements, firms would need to implement a process that would include additional costs for delivery, especially for small firms who are more likely to conduct such delivery in hard copy.1459 Another commenter stated that the existing Form ADV brochure delivery requirements and the ongoing delivery requirements of the relationship summary would impose unjustifiable administrative burdens on advisers, the majority of whom the commenter considers to be small businesses.1460 The commenter defined the term ‘‘small business’’ as an investment adviser who has ten or fewer non-clerical employees.1461 As discussed in Section VI.C.1 below, the definition of small entities for purposes of the Advisers Act and the Regulatory Flexibility Act concerns assets under management and total assets, not the number of employees.1462 Therefore, we are unable to assess whether the businesses the commenter is discussing fall under the definition of small entity for purposes of the Advisers Act and the Regulatory Flexibility Act.1463 As discussed in Section VI.C.1 below, the new requirements will not affect most investment advisers that are small entities because they are generally registered with one or more state securities authorities and not with the Commission. We agree that the ongoing delivery requirements will impose added costs, as discussed above in the Economic Analysis and Paperwork Reduction Act 1457 See NSCP Letter; Pickard Djinis and Pisarri Letter. 1458 As discussed in Section II.C.3.c, firms must deliver the most recent relationship summary to a retail investor who is an existing client or customer upon certain triggers. Also, firms must deliver the relationship summary to a retail investor within 30 days upon the retail investor’s request. 1459 See NSCP Letter. 1460 See Pickard Djinis and Pisarri Letter. 1461 Id. 1462 See 17 CFR 275.0–7. 1463 Id. E:\FR\FM\12JYR2.SGM 12JYR2 jbell on DSK3GLQ082PROD with RULES2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations Analysis,1464 but the costs may not necessarily be higher for small firms. To the extent that small firms are more likely to have fewer retail investors than larger firms, the ongoing delivery requirements should impose lower variable costs on small firms than on larger firms. Therefore, the ongoing delivery requirements should impose lower variable costs on small firms, who have fewer retail investors, than on larger firms who have more retail investors. Also, firms have the flexibility to communicate any changes in the relationship summary by either delivering the relationship summary or by communicating the information through another disclosure that is delivered to the retail investor, which should mitigate the costs to all firms, including small firms.1465 The additional hours per investment adviser and broker-dealer, the monetized cost per investment adviser and brokerdealer, and the incremental external legal and compliance cost for investment advisers and broker-dealers, attributable to ongoing delivery requirements are estimated above in the Paperwork Reduction Analysis.1466 To the extent that the ongoing delivery requirements impose added costs to small investment advisers, we disagree that existing Form ADV brochure delivery requirements and the ongoing delivery requirements of the relationship summary would impose administrative burdens on small investment advisers that are unjustifiable. As discussed in Section II.C.3.c above, the relationship summary and the existing Form ADV brochure serve different purposes. The relationship summary is designed to provide a high-level overview to retail investors while the Form ADV brochure is designed to present more detailed disclosures. The Commission is not adopting different ongoing delivery requirements for small entities. For the reasons discussed in Section VI.E below, establishing different compliance or reporting requirements for small investment advisers and small brokerdealers will be inappropriate under these circumstances. Moreover, retail investors considering and receiving services should receive current information from all firms, not just larger firms, to help them make a decision about continuing to receive services and to let them know when there have been changes to this information. They should also 1464 See supra Sections IV and V. supra Sections II.C.4 and IV.D.2. 1466 See supra Sections V.C.2 and V.D.2. 1465 See VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 understand their available options during certain decision points when firms are required to deliver another relationship summary.1467 Additionally, it is important and beneficial for retail investors to receive a relationship summary within 30 days upon request to ensure that retail investors receive the relationship summary as needed. As a result, we believe that the benefits to retail investors justify the potential cost of ongoing delivery. C. Small Entities Subject to the Rule and Rule Amendments The amendments will 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 Regulatory Flexibility Act, an investment adviser generally is a small entity if it: (i) Has assets under management having a total value of less than $25 million; (ii) did not have total assets of $5 million or more on the last day of the most recent fiscal year; and (iii) 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.1468 As discussed in Section V.A.1 above, the Commission estimates that based on IARD data as of December 31, 2018, approximately 8,235 investment advisers will be subject to new rule 204–5 under the Advisers Act, Form CRS (required by new Part 3 of Form ADV) (the relationship summary), the amendments to rules 203–1, 204–1, and rule 204–2 under the Advisers Act.1469 Our new rules and amendments will 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 1467 As discussed in Section II.C.3.c, firms must deliver the most recent relationship summary to a retail investor who is an existing client or customer before or at the time the firm: (i) Opens a new account that is different from the retail investor’s existing account(s); (ii) recommends that the retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) recommends or provides a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account. 1468 See 17 CFR 275.0–7. 1469 See supra footnote 1204 and accompanying text. PO 00000 Frm 00307 Fmt 4701 Sfmt 4700 33623 203A of the Advisers Act, most small advisers are prohibited from registering with the Commission and are regulated by state regulators.1470 Based on IARD data, we estimate that as of December 31, 2018, approximately 561 SECregistered advisers are small entities under the Regulatory Flexibility Act.1471 Of these, 183 have individual high net worth and individual non-high net worth clients, and will therefore be subject to the new requirements under the Advisers Act.1472 2. Broker-Dealers For purposes of Commission rulemaking in connection with the Regulatory Flexibility Act, a brokerdealer will be deemed a small entity if it: (i) Had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to rule 17a–5(d) under the Exchange Act,1473 or, if not required to file such statements, had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (ii) is not affiliated with any person (other than a natural person) that is not a small business or small organization.1474 As discussed in Section V.D.1 above, the Commission estimates that as of December 31, 2018, approximately 2,766 broker-dealers will be subject to the new Form CRS (relationship summary) requirements and new Exchange Act rule 17a–14, as well as 1470 15 U.S.C. 80b–3a. on SEC-registered investment adviser responses to Items 5.F. and 12 of Form ADV. 1472 Based on SEC-registered investment adviser responses to Items 5.D.(a)(1), 5.D.(a)(3), 5.D.(b)(1), 5.D.(b)(2), 5.F. and 12 of Form ADV. These responses indicate that the investment adviser has clients that are high net worth individuals and/or individuals (other than high net worth individuals), or that the investment adviser has regulatory assets under management attributable to clients that are high net worth individuals and/or individuals (other than high net worth individuals), and that the investment adviser is a small entity. Of these small advisers, two are dually registered as a broker-dealer and an investment adviser and may offer services to retail investors as both a brokerdealer and an investment adviser (e.g., ‘‘dual registrants’’ for purposes of the relationship summary). See supra footnote 63. As discussed in Section II.C.2, dual registrants must file the relationship summary using both IARD and Web CRD®. In this FRFA, dual registrants are counted in both the total number of small advisers and small broker-dealers that would be subject to the new requirements. 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. 1473 17 CFR 240.17a–5(d). 1474 See 17 CFR 240.0–10(c). 1471 Based E:\FR\FM\12JYR2.SGM 12JYR2 33624 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations amendments to Exchange Act rules 17a– 3 and 17a–4.1475 Further, based on FOCUS Report data, the Commission estimates that as of December 31, 2018, approximately 985 broker-dealers may be deemed small entities under the Regulatory Flexibility Act. Of these, approximately 756 have retail business, and will be subject to the new requirements.1476 D. Projected Reporting, Recordkeeping, and Other Compliance Requirements The new requirements impose certain reporting and compliance requirements on certain investment advisers and broker-dealers, including those that are small entities, requiring them to create and update relationship summaries, and comply with certain filing, delivery, and recordkeeping requirements. The new requirements are summarized in this FRFA (Section VI.A above). All of these requirements are also discussed in detail, in Section II above, and these requirements as well as the costs and burdens on investment 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. jbell on DSK3GLQ082PROD with RULES2 1. Initial Preparation and Filing of the Relationship Summary Requiring each firm that offers services to retail investors to prepare and file a relationship summary will impose additional costs on may firms, including some small advisers and small broker-dealers. Investment advisers must file their relationship summary as Form ADV Part 3 (Form CRS) electronically through IARD. Broker-dealers must file their relationship summary as Form CRS electronically through Web CRD®. All relationship summaries must be filed using text-searchable format with machine-readable headings. Investment Advisers. Our Paperwork Reduction Analysis and Economic Analysis discuss the costs and burdens of preparing and filing the relationship summary for investment advisers, including small advisers.1477 In addition, as discussed in our Paperwork Reduction Analysis, above, we anticipate that some advisers may incur a one-time initial cost for external legal and compliance consulting fees in connection with the initial preparation of the relationship summary.1478 1475 See supra footnote 1352 and accompanying text. 1476 See supra footnote 1352 (discussing how we identify retail sales activity from Form BR). 1477 See supra Sections V.A and IV.D.2. 1478 See supra Section V.A. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 Generally, all advisers, including small advisers that advise retail investors are currently required to prepare and distribute Part 2A of Form ADV (the firm brochure). Because advisers already provide disclosures about their services, fees, costs, conflicts, and disciplinary history in their firm brochures,1479 they will be able to use some of this information to respond to the disclosure requirements of the relationship summary. They will, however, have to draft a completely new disclosure to comply with the new format of the relationship summary. As discussed above, approximately 183 small advisers currently registered with us will be subject to the new requirements.1480 As discussed above in our Paperwork Reduction Act Analysis, the new initial preparation and filing requirements will impose an annual burden of approximately 6.67 annual hours per adviser, or 1,221 annual hours in aggregate for small advisers.1481 We therefore expect the annual monetized costs to small advisers associated with these amendments to be $1,965 per adviser, or $359,595 in aggregate for small advisers.1482 We expect the incremental external legal and compliance cost for small advisers to be estimated at $825 per adviser, or $150,975 in aggregate for small advisers.1483 Broker-Dealers. Our Paperwork Reduction Analysis and Economic Analysis discuss the costs and burdens of preparing and filing the relationship summary for broker-dealers, including small broker-dealers.1484 In addition, as discussed in our Paperwork Reduction Analysis, above, we anticipate that some broker-dealers may incur a one-time initial cost for external legal and compliance consulting fees in connection with the initial preparation supra footnote 904. supra Section VI.C.1. 1481 See supra Section V.A.2. As discussed in the Paperwork Reduction Act Analysis, we expect each investment adviser to spend approximately 20 hours preparing and filing the relationship summary, which as amortized over three years is approximately 6.67 hours. 6.67 hours per adviser for preparing and filing the relationship summary × 183 small advisers = approximately 1,221 hours in aggregate for small advisers. 1482 See supra Sections V.A.2. Monetized cost of $1,965 per adviser for the initial preparation and filing of the relationship summary × 183 small advisers = $359,595 monetized cost in aggregate for small advisers. As discussed in the Paperwork Reduction Act Analysis, we believe that performance of this function will most likely be equally allocated between a senior compliance examiner and a compliance manager. 1483 See supra Section V.A.2.b. $825 in external legal and compliance costs per adviser × 183 small advisers = $150,975 in aggregate for small advisers. 1484 See supra Sections V.D and IV.D.2. PO 00000 1479 See 1480 See Frm 00308 Fmt 4701 Sfmt 4700 of the relationship summary.1485 As discussed in Sections IV.D.2 and V.D.2, broker-dealers are not currently required to deliver to their retail investors a comprehensive written document comparable to investment advisers’ Form ADV Part 2A. Therefore, brokerdealers may incur comparatively greater compliance costs than investment advisers. As discussed above, approximately 756 small broker-dealers will be subject to the new requirements.1486 As discussed above in our Paperwork Reduction Act Analysis, the new initial preparation and filing requirements will impose an annual burden of approximately 13.33 annual hours per broker-dealer, or 10,077 annual hours in aggregate for small broker-dealers.1487 We therefore expect the annual monetized costs to small broker-dealers associated with these amendments to be $3,640 per brokerdealer, or $2,751,840 in aggregate for small broker-dealers.1488 We expect the incremental external legal and compliance cost for small broker-dealers to be estimated at $1,032 per brokerdealer, or $780,192 in aggregate for small broker-dealers.1489 Costs Generally. 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 two pages for a standalone investment adviser and standalone broker-dealer and four pages for a dual registrant in length or equivalent limit if in electronic format. Second, although the relationship summary will require more narrative responses, the disclosure will still involve some degree of standardization across firms, requiring firms to use standardized headings in a prescribed order. Third, firms will be prohibited 1485 See supra Section V.D. supra Section VI.C.2. 1487 See supra Section V.D.2. As discussed in the Paperwork Reduction Act Analysis, we expect each broker-dealer to spend approximately 40 hours preparing and filing the relationship summary, which as amortized over three years is approximately 13.33 hours. 13.33 hours per brokerdealer for preparing and filing the relationship summary × 756 small broker-dealers = approximately 10,077 hours in aggregate for small broker-dealers. 1488 See supra Section V.D.2. Monetized cost of $3,640 per broker-dealer for the initial preparation and filing of the relationship summary × 756 small broker-dealers = $2,751,840 monetized cost in aggregate for small broker-dealers. As discussed in the Paperwork Reduction Act Analysis, we believe that the performance of this function will most likely be equally allocated between a senior compliance examiner and a compliance manager. 1489 See supra Section V.D.2.b. 756 small brokerdealers × $1,032 in external legal and compliance costs on average per broker-dealer = $780,192. 1486 See E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 from including disclosures in the relationship summary other than the disclosure that is required or permitted by the Instructions and applicable items. The compliance costs could, however, be different across firms with relatively smaller or larger numbers of retail investors as customers or clients. For example, as discussed in Section IV.D.2 above, to the extent that developing the relationship summary entails a fixed cost, firms with fewer retail investors as customers or clients may be at disadvantage relative to firms with more retail investors as customers or clients because the former would amortize these costs over a smaller retail investor base. Therefore, to the extent that small firms are more likely to have fewer retail investors than larger firms, small firms may be at a disadvantage relative to larger firms. On the other hand, smaller firms are likely to have fewer types of fees, costs, and conflicts to report compared to larger firms, potentially making it less burdensome for them to summarize the required information. As discussed in Section IV.D.2 above, small advisers and small broker-dealers may disproportionately incur costs associated with electronic and graphical formatting, particularly if they do not have an existing web presence. However, because the final instructions encourage, but do not require electronic and graphical formatting, firms would only bear these costs if they expected these features to provide benefits that justify these costs. Similarly, small advisers and small broker dealers may disproportionally incur costs associated with the requirement to file their relationship summaries with machinereadable headings and text-searchable format. However, costs for firms, including small entities, could be minimal to the extent they implement structured headings in PDF formatted documents by creating a bookmark for each of the headings.1490 2. Delivery and Updating Requirements Related to the Relationship Summary As discussed in Section II.C above, firms must follow certain delivery and updating requirements. Investment advisers must deliver a relationship summary to each retail investor before or at the time the firm enters into an investment advisory contract with the retail investor, even if the agreement is oral. Broker-dealers must deliver a relationship summary to each retail investor, before or at the earliest of: (i) A recommendation of an account type, a securities transaction, or an 1490 See supra Section II.C.2. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) the opening of a brokerage account for the retail investor. Dual registrants must deliver the relationship summary at the earlier of the delivery requirements for the investment adviser or broker-dealer. As discussed in Section II.C above, firms must update, file amendments to, and re-deliver the relationship summary under certain circumstances. Specifically, firms must update the relationship summary and file it within 30 days whenever any information in the relationship summary becomes materially inaccurate. The filing must include an exhibit highlighting changes. Firms must communicate any changes in the updated relationship summary to retail investors who are existing clients or customers within 60 days after the updates are required to be made and without charge.1491 Additionally, firms must deliver the relationship summary to a retail investor within 30 days upon the retail investor’s request and redeliver the relationship summary to existing clients and customers under certain circumstances.1492 As discussed in Sections II.C above, we are adopting requirements concerning electronic posting and manner of delivery. Firms must post the current version of the relationship summary prominently on their public website, if they have one. Firms must include a telephone number where retail investors can request up-to-date information and request a copy of the relationship summary. Firms must make a copy of the relationship summary available upon request without charge. If the relationship summary is delivered electronically, it must be presented prominently in the electronic medium. If the relationship summary is delivered in paper format as part of a package of documents, firms must ensure that the relationship summary is the first among any documents that are delivered at that time. The additional hours per adviser and broker-dealer, the monetized cost per adviser and broker-dealer, and the 1491 Firms can make the communication by delivering the amended relationship summary or by communicating the information through another disclosure that is delivered to the retail investor. 1492 Specifically, firms must deliver the most recent relationship summary to a retail investor who is an existing client or customer before or at the time the firm: (i) Opens a new account that is different from the retail investor’s existing account(s); (ii) recommends that the retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) recommends or provides a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account. PO 00000 Frm 00309 Fmt 4701 Sfmt 4700 33625 incremental external legal and compliance cost for small entity investment advisers and broker-dealers, attributable to these requirements are estimated above in the Paperwork Reduction Analysis.1493 3. Recordkeeping Requirements Related to the Relationship Summary As discussed in Section II.E above, we are adopting amendments to the recordkeeping requirements under Advisers Act rule 204–2 and Exchange Act rules 17a–3 and 17a–4 to address the new relationship summary.1494 The amendments to Advisers Act rule 204– 2 will require investment advisers who are registered or required to be registered to make and keep true, accurate and current, a copy of each relationship summary and each amendment or revision to the relationship summary, as well as a record of the dates that each relationship summary, and each amendment or revision thereto, was given to any client or to any prospective client who subsequently becomes a client. Investment advisers must maintain and preserve their respective records in an easily accessible place for a period of 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.1495 The amendments to Exchange Act rule 17a– 3 will require broker-dealers to make and keep current a record of the date that each relationship summary was provided to each retail investor, including any relationship summary that was provided before such retail investor opens an account. The amendments to Exchange Act rule 17a– 4 will require broker-dealers to maintain and preserve in an easily accessible place all record dates described above as well as a copy of each relationship summary until at least six years after such record or relationship summary is created. These amendments are designed to update recordkeeping rules in light of the new relationship summary, and, for investment advisers, they mirror the current recordkeeping requirements for the Form ADV brochure and brochure supplement.1496 As discussed in Section II.E above, the recordkeeping requirements will facilitate the Commission’s ability to inspect for and enforce compliance with the 1493 See supra Section V. CFR 275.204–2; 17 CFR 240.17a–3; 17 CFR 240.17a–4. 1495 See 17 CFR 275.204–2(e)(1). 1496 See 17 CFR 275.204–2(a)(14)(i) and 17 CFR 275.204–2(e)(1). 1494 17 E:\FR\FM\12JYR2.SGM 12JYR2 33626 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 relationship summary requirements and also may facilitate firms’ ability to monitor for compliance with delivery requirements. As discussed in the Paperwork Reduction Act Analysis in Section V.B above, the amendments to Advisers Act rule 204–2 will impose an annual burden of approximately 0.2 annual hours per adviser, or 37 annual hours in aggregate for small advisers.1497 We therefore expect the annual monetized costs to small advisers associated with these amendments to be $12 per adviser,1498 or $2,196 in aggregate for small advisers.1499 We do not expect investment advisers to incur any external costs with respect to the amendments to Advisers Act rule 204– 2.1500 As discussed in the Paperwork Reduction Act Analysis in Sections V.E and V.F, the amendments to Exchange Act rules 17a–3 and 17a–4 will impose an annual burden of approximately 0.6 annual hours per broker-dealer, or 454 annual hours in the aggregate for small broker-dealers.1501 We therefore expect the annual monetized cost to small broker-dealers associated with these amendments to be $39 per brokerdealer,1502 or $29,484 in aggregate for small broker-dealers.1503 We do not 1497 0.2 hours × 183 small advisers = 37 hours, when rounded up to the nearest hour. 1498 As discussed in, the Paperwork Reduction Analysis, we believe the 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. See supra Section V.B. 1499 $12 per adviser × 183 small advisers = approximately $2,196 in aggregate for small advisers. 1500 See supra Section V.B. 1501 As discussed in Section V.E, amendments to Exchange Act rule 17a–3 will impose a burden of approximately 0.5 annual hours per broker-dealer. As discussed in Section V.F, amendments to Exchange Act rule 17a–4 will impose a burden of approximately 0.1 annual hours per broker-dealer. Therefore, together, amendments to Exchange Act rules 17a–3 and 17a–4 will impose a burden of approximately 0.6 hours annually. 0.6 hours × 756 small broker-dealers = approximately 454 annual hours in aggregate for small broker-dealers. 1502 $32 per broker dealer for amendments to Exchange Act rule 17a–3 + $7 per broker-dealer for amendments to Exchange Act rule 17a–4 = $39 per broker-dealer. As discussed in the Paperwork Reduction Act Analysis, we believe that the performance of the functions associated with the amendments to Exchange Act rule 17a–3 will most likely be allocated between compliance clerks and general clerks. Also as discussed in the Paperwork Reduction Act Analysis, we believe that the performance of the functions associated with the amendments to Exchange Act rule 17a–4 will be performed by compliance clerks. See supra Sections V.E and V.F. 1503 $32 per broker dealer for amendments to Exchange Act rule 17a–3 + $7 per broker-dealer for amendments to Exchange Act rule 17a–4 = $39 per broker-dealer. $39 × 756 small broker-dealers = $29,484. See supra Sections V.E and V.F. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 expect broker-dealers to incur any external costs with respect to the amendments to Exchange Act rules 17a– 3 and 17a–4.1504 E. Agency Action To Minimize Effect on Small Entities The Regulatory Flexibility Act directs the Commission to consider significant alternatives that would accomplish the stated objective, while minimizing any significant adverse impact on small entities. We considered the following alternatives for small entities in relation to the new requirements: (i) The establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (ii) the clarification, consolidation, or simplification of compliance and reporting requirements for small entities; (iii) the use of performance rather than design standards; and (iv) an exemption from coverage of the new requirements, or any part thereof, for such small entities.1505 Regarding the first alternative, the Commission believes that establishing different compliance or reporting requirements for small advisers and small broker-dealers will be inappropriate under these circumstances. We considered adopting tiered compliance dates so that smaller investment advisers and smaller brokerdealers would have had more time to comply. This would have been an alternative to the proposal, which did not include such tiered compliance. However, as adopted, instead of providing more time to smaller investment advisers and smaller brokerdealers only, we are extending the compliance dates for all firms. As discussed in Section II.D above, we believe the final compliance dates provide adequate notice and opportunity for all firms to comply with the new requirements. 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 will be inconsistent with the purposes of the Advisers Act and the Exchange Act to specify differences for small entities under the new requirements. As discussed above, we believe that the new requirements will result in multiple benefits to all retail investors, including alerting retail investors to certain information to consider when deciding whether to (i) establish an investment advisory or brokerage relationship, (ii) engage a particular firm or financial professional, or (iii) terminate or switch a relationship or specific service.1506 In addition, the content of the relationship summary will facilitate comparisons across firms.1507 We believe that these benefits should apply to retail investors that engage smaller firms as well as retail investors that engage larger firms. To establish different disclosure requirements for small entities will diminish this investor protection for clients and customers of small entities. As discussed above in Section II.C above, we are requiring that investment advisers and broker-dealers file their relationship summaries with the Commission.1508 As discussed in Section II.C.2, there are several reasons we are requiring the relationship summaries to be filed with the Commission. First, the public will benefit by being able to use a central location to find any firm’s relationship summary,1509 which may facilitate simpler comparisons across firms. Second, some firms may not maintain a website, and therefore their relationship summaries will not otherwise be accessible to the public. Third, by having firms file the relationship summaries with the Commission, Commission staff can more easily monitor the filings for compliance. These benefits of filing are important for retail investors who are 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 so using the internet to file electronically should not increase costs for those advisers.1510 All relationship 1506 See supra Sections IV and VI.A. supra Sections I and IV. 1508 Investment advisers must file their relationship summaries with the Commission electronically through IARD in the same manner as they currently file Form ADV Parts 1 and 2. Brokerdealers must file their relationship summaries with the Commission electronically through Web CRD®. Dual registrants must file the relationship summary using both IARD and Web CRD®. 1509 The filed relationship summaries will be accessible through the Commission’s investor education website Investor.gov. See supra footnote 661 and accompanying text. 1510 Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, Investment 1507 See supra Sections V.E and V.F. discussed in the Economic Analysis in Section IV.D.4, the Commission considered the following alternatives as they affect all firms, including small entities: (i) Requiring a new, separate disclosure versus amending existing disclosure requirements; (ii) alternatives concerning the form and format of the relationship summary; (iii) alternatives concerning the disclosures concerning the summary of fees, costs, conflicts, and standard of conduct; (iv) alternatives concerning filing and delivery; and (v) alternatives to compliance deadlines, including transition provisions. PO 00000 1504 See 1505 As Frm 00310 Fmt 4701 Sfmt 4700 E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations jbell on DSK3GLQ082PROD with RULES2 summaries must be filed using a textsearchable format with machinereadable headings. There are several reasons we are requiring firms to file their relationship summaries with machine-readable headings and textsearchable format, including that this formatting will facilitate the aggregation and comparison of responses to specific items across different relationship summaries and is consistent with the Commission’s ongoing efforts to modernize our forms by taking advantage of technological advances, both in the manner in which information is reported to the Commission and how it is provided to investors and other users, as discussed above.1511 These benefits are important for filings by all firms and would be significantly reduced by allowing different requirements for small entities. Costs for firms, including small entities, could be minimal to the extent they implement structured headings in PDF formatted documents by creating a bookmark for each of the headings.1512 The requirement for investment advisers and broker-dealers to post their relationship summary on their public websites, if they have a public website, in a location and format that is easily accessible for retail investors, already incorporates the flexibility to permit different compliance and reporting requirements for small entities, if applicable. To the extent that brokerdealers and investment advisers that are small entities are less likely to have public websites and do not have them, they will not be required to post the relationship summary on their websites.1513 In other ways, as well, the requirements incorporate flexibility for small broker-dealers and small advisers to comply with the requirements. For instance, we are requiring firms to communicate the information in an updated relationship summary to retail investors who are existing clients or customers within 60 days after the updates are required to be made and without charge.1514 Firms can communicate this information by Advisers Act Release No. 1862 (Apr. 5, 2000) [65 FR 20524 (Apr. 17, 2000)], 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 includes the relationship summary, if it can demonstrate that filing electronically would impose an undue hardship. See General Instruction 17 to Form ADV. 1511 See supra Section II.C.2. 1512 See supra Section II.C.2. 1513 Firms must provide a telephone number in their relationship summary that retail investors can call to obtain up-to-date information and request a copy of the relationship summary. See supra Section II.B.5. 1514 See supra Section II.C.4. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 delivering the amended relationship summary or by communicating the information through another disclosure that is delivered to the retail investor. This requirement provides firms the ability to disclose changes without requiring them to duplicate disclosures and incur additional costs. We believe it will be inappropriate to establish different recordkeeping requirements for small entities, because the recordkeeping requirements will facilitate the Commission’s ability to inspect for and enforce compliance with firms’ obligations with respect to the relationship summary, which is important for retail investor clients and customers of both large and small firms. Also, the Commission is not adopting different ongoing delivery requirements for small entities for the reasons discussed in Section VI.B above. Regarding the second alternative, we clarified and simplified certain requirements for all entities, as an alternative to the proposal.1515 However, we believe the final requirements are clear and that further clarification, consolidation, or simplification of the compliance and reporting requirements separately for small entities is not necessary. For the same reasons discussed above in this section concerning the first alternative, we believe that further clarifying, consolidating, or simplifying the requirements only for small entities will be inappropriate under these circumstances. Regarding the third alternative, we considered using performance rather than design standards. Performance standards would allow for increased flexibility in the methods firms can use to achieve the objectives of the requirements. Design standards would specify the behavior or manner of compliance that regulated entities must adopt. We revised the combination of performance and design standards of the requirements, as an alternative to the 1515 See supra Sections I and II. For example, we have clarified re-delivery requirements by replacing the proposed standard of ‘‘materially change the nature and scope of the relationship’’ with two more specific and easily identifiable triggers that we believe would not implicate the same operational or supervisory burdens described by commenters to meet the proposed requirement. As another example, in a change from the proposal, we eliminated the proposed requirement that standalone broker-dealers and standalone investment advisers include a separate section using prescribed wording that generally describes how the services of investment advisers and brokerdealers, respectively, differ from the firm’s services. Instead, we adopted a simpler approach so firms will be required to simply state that free and simple tools are available to research firms and financial professionals at Investor.gov/CRS, which also provides educational materials about brokerdealers, investment advisers, and investing. PO 00000 Frm 00311 Fmt 4701 Sfmt 4700 33627 proposal.1516 The Commission believes that the final relationship summary and the related new rules and amendments appropriately use a combination of performance and design standards for all firms, including those that are small entities. The Commission is adopting certain performance standards as an alternative to design standards so firms will have some flexibility in how they complete the relationship summary. Instead of requiring extensive prescribed language, as proposed, prescribed wording will be limited and, instead, firms will complete most of the relationship summary using their own words.1517 Although this increases costs to firms, including small firms, as discussed above,1518 firms will now have the flexibility to create disclosures that are more accurately tailored to their business, and therefore more understandable and relevant to retail investors.1519 In addition, we are encouraging, but not requiring, firms to use charts, graphs, tables, and other graphics or text features to respond to the required disclosures.1520 In an alternative to the proposal, which required dual registrants to file a single relationship summary, dual registrants will have the flexibility to decide whether to prepare separate or combined relationship summaries.1521 In another alternative to the proposal, which required firms to provide a tollfree telephone number under certain circumstances, we are not requiring the telephone number to be toll-free.1522 As discussed in Section II.B.5 above, firms must include a telephone number where retail investors can request up-to-date information and request a copy of the relationship summary. Although we are adopting a requirement to provide a telephone number, we are not requiring the telephone number to be toll-free. If firms, including small firms, do not already have a toll-free telephone number, they will not be required to obtain one to comply with the requirements of the relationship summary. Firms will have the flexibility to decide whether the telephone number 1516 See supra Sections I and II. For example, in the final requirements we require less prescribed wording, and provide more flexibility in certain formatting and filing requirements. See supra Sections II.A.1 (discussing limited prescribed wording) and II.A.5 (discussing more flexible formatting and filing requirements for dual registrants). 1517 See supra Section II.A.1. 1518 See supra Sections V.A and V.D. 1519 See supra Section II.A.1. 1520 See supra Section II.A.3. 1521 See supra Section II.A.5. 1522 See supra Section II.B.5. E:\FR\FM\12JYR2.SGM 12JYR2 jbell on DSK3GLQ082PROD with RULES2 33628 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations they provide in their relationship summary will be toll-free. In conjunction with the performance standards, the Commission is adopting certain design standards. For example, with respect to delivery requirements, as discussed in Section II.C.3.c above, in an alternative to the proposal, we replaced a performance standard with a design standard to clarify requirements and reduce operational and supervisory burdens. Specifically, we proposed a performance standard that would have required a firm to deliver a relationship summary to an existing client or customer when changes are made to the existing account that would ‘‘materially change the nature and scope of the relationship.’’ This requirement would have required analysis about facts and circumstances and commenters expressed concern that it would impose operational and supervisory burdens. In response, we replaced the standard of ‘‘materially change the nature and scope of the relationship’’ with two, more specific and easily identifiable, triggers that we believe would not implicate the same operational or supervisory burdens described by commenters to meet the proposed requirement. Therefore, the final requirements set forth specific triggers that require redelivery of the relationship summary in situations that the proposed ‘‘material changes’’ language sought to address, but are presented as a design standard rather than a performance standard and, as a result, are designed to ease burdens for all firms, including small entities. The relationship summary includes design standards to more easily allow for comparability among firms. These requirements specify the headings and sequence of the topics; prohibit disclosure other than the disclosure that is required or permitted; limit the length of the relationship summary; and require limited prescribed language in certain sections. The Commission considered alternative performance standards such as unlimited page numbers and not prohibiting disclosure other than the disclosure that is required or permitted. However, as discussed in Section II.A.1 above, we believe that retail investors will benefit from receiving a relationship summary that contains high-level information, with the ability to access more detailed information. We also believe that the relationship summary should present information that is responsive and relevant to the topics covered by the final instructions. We believe that allowing only the mandatory or permissible information will promote consistency of information presented to investors, and allow investors to focus VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 on relevant information that is helpful in deciding among firms. We believe that the design standards that we are adopting will provide comparative information in a user-friendly format that helps retail investors with informed decision making. 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 retail investors receive certain information in a manner that promotes comparability. 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 new requirements, 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 firms, it would be inconsistent with the purposes of the Advisers Act and Exchange Act to specify differences for small entities under the final requirements. As discussed above, we believe that the new requirements will result in multiple benefits to all retail investors, including alerting retail investors to certain information to consider when deciding whether to (i) establish an investment advisory or brokerage relationship, (ii) engage a particular firm or financial professional, or (iii) terminate or switch a relationship or specific service.1523 In addition, the content of the relationship summary will facilitate comparisons across firms.1524 We believe that providing this information at the prescribed timeframes is appropriate and in the public interest and will improve investor protection by helping retail investors to make a more informed choice among the types of firms and services available to them. Because 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 will be inconsistent with the purpose of the relationship summary to specify different requirements for small entities.1525 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 adopting 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 adopting 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 adopting 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 adopting amendments to 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 adopting 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 sections 3, 10, 15, 15(c)(6), 15(l), 17, 23 and 36 thereof 15 U.S.C. 78c, 78j, 78o, 78o(c)(6), 78o(l), 78q, 78w and 78mm, and section 913(f) of Title IX of the Dodd-Frank Act. The Commission is adopting amendments to rule 800 under the Organization; Conduct and Ethics; and Information and Requests pursuant to the authority set forth in PRA sections 3506 and 3507 [44 U.S.C. 3506, 3507]. VII. Statutory Authority The Commission is adopting amendments to rule 203–1 under the Text of the Rule and Form List of Subjects in CFR Part 200 supra Sections IV and VI.A. 1524 See supra Sections I and IV. 1525 See supra Sections I and IV (discussing investor confusion). PO 00000 1523 See Frm 00312 Fmt 4701 Sfmt 4700 Administrative practice and procedure, Organization and functions (Government agencies). E:\FR\FM\12JYR2.SGM 12JYR2 33629 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 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. For the reasons set out in the preamble, title 17, chapter II of the Code of Federal Regulations is amended as follows: 2. In § 200.800, the table in paragraph (b) is amended by adding an entry in numerical order by part and section number for ‘‘Form CRS’’ to read as follows: ■ PART 200—ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND REQUESTS Subpart N—Commission Information Collection Requirements Under the Paperwork Reduction Act: OMB Control Numbers 1. The authority citation for part 200 subpart N continues to read as follows: ■ § 200.800 OMB control numbers assigned pursuant to the Paperwork Reduction Act. * * * (b) * * * 17 CFR part or section where identified and described * * * * * Form CRS ........................................................................................................................................................ * * 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 240.17a–14 is also issued under Public Law 111–203, sec. 913, 124 Stat. 1376 (2010). * * * * * 4. Section 240.17a–3 is amended by adding paragraph (a)(24) to read as follows: ■ jbell on DSK3GLQ082PROD with RULES2 § 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: ■ VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 * * 3. The general authority citation for part 240 continues to read as follows and sectional authority for 240.17a-14 is added to read as follows: ■ * * § 240.17a–4 Records to be preserved by certain exchange members, brokers and dealers. PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 * Authority: 44 U.S.C. 3506; 44 U.S.C. 3507. Information collection requirement * * * * * * (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: § 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 Central Registration Depository (‘‘Web CRD®’’) operated by the Financial Industry Regulatory Authority, Inc., and thereafter, file an amended Form CRS in accordance with the instructions in Form CRS. (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 earliest of: (i) A recommendation of an account type, a securities transaction; or an investment strategy involving securities; (ii) Placing an order for the retail investor; or PO 00000 Frm 00313 Fmt 4701 Sfmt 4700 * 249.640 * Current OMB control No. * 3235–0766 * (iii) The opening of a brokerage account for the retail investor. (2) Deliver to each retail investor who is an existing customer your current Form CRS before or at the time you: (i) Open a new account that is different from the retail investor’s existing account(s); (ii) Recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) Recommend or provide a new brokerage service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account. (3) Post the current Form CRS prominently on your public 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 60 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 through another disclosure that is delivered 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: E:\FR\FM\12JYR2.SGM 12JYR2 33630 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations (1) Current Form CRS means the most recent version of the Form CRS. (2) Retail investor means a natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes. (f) Transition rule. (1) If you are registered with the Commission prior to June 30, 2020, pursuant to Section 15 of the Act, you must file your initial Form CRS with the Commission in accordance with section (b)(2) of this section, beginning on May 1, 2020, and by no later than June 30, 2020. (2) On or after June 30, 2020, if you file an application for registration with the Commission or have an application for registration pending with the Commission as a broker or dealer pursuant to Section 15 of the Act, you must begin to comply with this section by the date on which your registration application becomes effective pursuant to Section 15 of the Act, including by filing your Form CRS in accordance with paragraph (b)(2) of this section. (3) Within 30 days after the date by which you are first required by paragraph (f) of this section to electronically file your initial Form CRS with the Commission, you must deliver to each of your existing customers who is a retail investor your current Form CRS. (4) As of the date by which you are first required to electronically file your Form CRS with the Commission pursuant to this section, you must begin using your Form CRS as required to comply with paragraph (c) of this rule. PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 7. The authority citation for part 249 is amended by revising the general authority and adding sectional authority for 249.640 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 249.641 is added to subpart G read as follows: jbell on DSK3GLQ082PROD with RULES2 * § 249.641 Form CRS, Relationship Summary for Brokers and Dealers Providing Services to Retail Investors, pursuant to § 240.17a–14 of this chapter. This form shall be prepared and filed by brokers and dealers registered with VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 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 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. Note 1 to paragraph (a)(1): Information on how to file with the IARD is available on the Commission’s website 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. (2)(i) On or after June 30, 2020, 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. (ii) Beginning on May 1, 2020, any initial application for registration as an investment adviser filed prior to June 30, 2020, must include a Form CRS that PO 00000 Frm 00314 Fmt 4701 Sfmt 4700 satisfies the requirements of Part 3 of Form ADV by no later than June 30, 2020. * * * * * ■ 11. Amend § 275.204–1 by revising paragraphs (a) and (b) and adding paragraph (e) to read as follows: § 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 (c) of this section, 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. * * * * * (e) Transition to Filing Form CRS. If you are registered with the Commission or have an application for registration pending with the Commission prior to June 30, 2020, you must amend your Form ADV by electronically filing with IARD your initial Form CRS that satisfies the requirements of Part 3 of Form ADV (as amended effective September 30, 2019) beginning on May 1, 2020 and by no later than June 30, 2020. Note 1 to paragraphs (e): This note applies to paragraphs (a), (b), and (e) of this section. Information on how to file with the IARD is available on our website 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: ■ E:\FR\FM\12JYR2.SGM 12JYR2 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations § 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 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. jbell on DSK3GLQ082PROD with RULES2 (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 you: (i) Open a new account that is different from the retail investor’s existing account(s); (ii) Recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment; or VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 (iii) Recommend or provide a new investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account. (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 60 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 through another disclosure that is delivered 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 natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes. (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 PO 00000 Frm 00315 Fmt 4701 Sfmt 4700 33631 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 comply with the requirements of paragraph (b) of this section. PART 279—FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 1940 14. 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. Note: The following amendment does not appear in the Code of Federal Regulations. 15. 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. ■ Dated: June 5, 2019. By the Commission. Vanessa A. Countryman, Acting Secretary. Note: The appendices will not appear in the Code of Federal Regulations. Appendices BILLING CODE 8011–01–P E:\FR\FM\12JYR2.SGM 12JYR2 33632 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations OMB APPROVAL OMB Number: 3235-0049 Expires: [Date] Estimated average burden hours per response [xx.xx] 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 fond 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 IIJ.ing, and the lARD? 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 lARD and electronic filing on the lARD 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 SEC 1707 ([06]-19) File 1 of 5 VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00316 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.006</GPH> jbell on DSK3GLQ082PROD with RULES2 • • Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations • 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. 33633 How is Form ADV organized? Form ADV contains five parts: • Part lA 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. o All advisers registering with the SEC or any of the state securities authorities must complete Part 1A. o Exempt reporting advisers (that are not also registering with any state securities authority) must complete only the following Items of Part lA: 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 lA also contains several supplemental schedules. The items of Part lA let you know which schedules you must complete. o Schedule A asks for information about your direct owners and executive officers. o Schedule B asks for information about your indirect owners. o Schedule C is used by paper filers to update the information required by Schedules A and B (see Instruction 18). o ScheduleD asks for additional information for certain items in Part lA. o ScheduleR asks for additional information about relying advisers. o Disclosure Reporting Pages (or DRPs) are schedules that ask for details about disciplinary events involving you or your advisory affiliates. • Part lB asks additional questions required by state securities authorities. Part lB 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 lB. (If you are filing electronically and you do not have to complete Part lB, you will not see Part lB). • 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 2031. VerDate Sep<11>2014 Part 2B requires advisers to create brochure supplements containing information about certain supervised persons. The requirements in Part 2B apply to all investment advisers 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00317 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.007</GPH> jbell on DSK3GLQ082PROD with RULES2 • 33634 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations registered with or applying for registration with the SEC, but do not apply to exempt reporting advisers. • 4. Part 3 requires advisers to create 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 accordance with the requirements of Part 3 of Form ADV. See Advisers Act Rule 203-1. When am I required to update my Form ADV? • SEC- and State-Registered Advisers: o 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 in Part 1A, 1B, 2A and 2B (as applicable), 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. You may, but are not required, to submit amended versions of the relationship summary required by Part 3 as part of your annual updating amendment. o 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 1A, 1B, 2A and 2B (as applicable) 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: VerDate Sep<11>2014 19:21 Jul 11, 2019 o information you provided in response to Items 1 (except 1.0. and Section l.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 2.1. of Part 1B or Sections 1 or 3 of Schedule R becomes inaccurate in any way; o information you provided in response to Items 4, 8, or 10 of Part 1A, or Item 2.G. ofPart 1B, or Section 10 of ScheduleR becomes materially inaccurate; or Jkt 247001 PO 00000 Frm 00318 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.008</GPH> jbell on DSK3GLQ082PROD with RULES2 o you are adding or removing a relying adviser as part of your umbrella registration; Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations o 33635 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 ofPart lA, Items 2.H. or 2.1. ofPart lB, Section l.F. of Schedule D or Section 2 of ScheduleR 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 lARD. 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 lARD. Part 3: Ifyou are registered with the SEC, you must amend Part 3 ofyour Form ADV within 30 days whenever any information in your relationship summary becomes materially inaccurate by filing with the SEC an additional other-than-annual amendment or by including the relationship summary as part of an annual updating amendment. You must include an exhibit highlighting the most recent changes required by Form ADV, Part 3 (Form CRS), General Instruction 8.C. • Exempt reporting advisers: VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00319 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.009</GPH> jbell on DSK3GLQ082PROD with RULES2 o Annual UpdatinJ! 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. 33636 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations o 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: • information you provided in response to Items 1 (except Item 1.0. and Section 1.F. of Schedule D), 3, or 11 becomes inaccurate in any way; or • 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. What is SEC umbrella registration and how can I satisfy the requirements of filing an umbrella registration? 5. 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: 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. 1. n. 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. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00320 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.010</GPH> jbell on DSK3GLQ082PROD with RULES2 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 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33637 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 ScheduleR should be completed for each relying adviser. References to "you" in ScheduleR refer to the relying adviser only. A filing adviser applying for registration with the SEC should complete a ScheduleR 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-thanannual 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: o Domestic Investment Adviser Execution Page, if you (the advisory firm) are a resident of the United States; or o Non-Resident Investment Adviser Execution Page, if you (the advisory firm) are not a resident of the United States. • Who must sign my Form ADV or amendment? The individual who signs the form depends upon your form of organization: VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00321 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.011</GPH> jbell on DSK3GLQ082PROD with RULES2 7. 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. 33638 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations • • • • • 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 (lARD) 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 lARD. 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 lARD system. See SEC rules 203-1 and 204-4. To file electronically, go to the lARD website (<www.iard.com>), which contains detailed instructions for advisers to follow when filing through the lARD. 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. How do I get started filing electronically? First, obtain a copy of the lARD Entitlement Package from the following website: <https://www.iard.com/GetStarted.asp>. Second, request access to the lARD system for your firm by completing and submitting the lARD Entitlement Package. The lARD 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 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00322 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.012</GPH> jbell on DSK3GLQ082PROD with RULES2 9. • Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33639 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 lARD 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 lARD 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. 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? 10. 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 lA. 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 SECregistered 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 lARD and your notice filings will be sent electronically to the state securities authorities that you check on Item 2.C. of Part lA. 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.(l) to (12) of Part lA, 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-l(b)(2). Each of your investment adviser representatives, however, may be subject to registration in those states in which the representative has a place ofbusiness. See Advisers Act section 203A(b)(l); 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. VerDate Sep<11>2014 I am registered with the SEC. When must I switch to registration with a state securities authority? 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00323 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.013</GPH> jbell on DSK3GLQ082PROD with RULES2 12. 33640 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 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 ofyour 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(1) ofthe 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. What do I do if I no longer meet the definition of "exempt reporting adviser"? jbell on DSK3GLQ082PROD with RULES2 • Advisers Switching to SEC Registration: o VerDate Sep<11>2014 You may no longer be an exempt reporting adviser and may be required to register with the SEC if you wish to continue doing business as an investment adviser. For 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00324 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.014</GPH> 15. Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33641 example, you may be relying on section 203(1) and wish to accept a client that is not a venture capital fund as defined in SEC rule 203(1)-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. o • If you are relying on section 203(1), 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(1)-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 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. 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. 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. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00325 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.015</GPH> jbell on DSK3GLQ082PROD with RULES2 o 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. 33642 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 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). • 16. Advisers Not Switching to SEC Registration: o 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. o 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. Are there filing fees? Yes. These fees go to support and maintain the lARD. The lARD filing fees are in addition to any registration or other fee that may be required by state law. You must pay an lARD 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 lARD 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. VerDate Sep<11>2014 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 lARD, 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). 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00326 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.016</GPH> jbell on DSK3GLQ082PROD with RULES2 • Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations • 33643 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 lA (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 lARD. 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 l.A. of Part 1A) and the date on every page. If you are amending your Form ADV: o complete page 1 and circle the number of any item for which you are changing your response. o 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. o complete the amended item in full and circle the number of the item for which you are changing your response. o 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: lARD 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. • 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 VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00327 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.017</GPH> jbell on DSK3GLQ082PROD with RULES2 19. 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. 33644 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 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 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 ofyour 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. 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 CFR 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 during the year to reflect material changes. See 17 CFR 275.204-1. The SEC maintains the information on the form and makes it publicly available through the lARD. 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 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00328 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.018</GPH> jbell on DSK3GLQ082PROD with RULES2 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. Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33645 APPENDIXB UNITED STATES 1 SECURITIES AND EXCHANGE COMMISSION FORM CRS OMB APPROVAL OMB Number: 3235-0766 Expires: [Date] Estimated average burden hours per response: [xx.xx] Sections 3, 10, 15, 15(c)(6), 15(/), 17, 23, and 36 of the Securities Exchange Act of 1934 ("Exchange Act") and section 913(f) of Title IX of the Dodd-Frank Act authorize the Commission to require the collection of the information on Form CRS from brokers and dealers. See 15 U.S.C. 78c, 78j, 78o, 78o(c)(6), 78o(l), 78q, 78w and 78mm. Filing Form CRS is mandatory for every broker or dealer registered with the Commission pursuant to section 15 of the Exchange Act that offers services to a retail investor. See 17 CFR 240.17a-14. Intentional misstatements or omissions constitute federal criminal violations (see 18 U.S.C. 1001 and 15 U.S.C. 78ff(a)). The Commission may use the information provided in Form CRS to manage its regulatory and examination programs. Form CRS is made publically available. 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. Any member of the public may direct to the Commission any comments concerning the accuracy of this burden estimate and any suggestions for reducing this burden. This collection of information has been reviewed by the Office of Management and Budget in accordance with the requirements of 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 information may be disclosed as outlined above and in the routine uses listed in the applicable system of records notice, SEC-70, SEC's Division of Trading and Markets Records, published in the Federal Register at 83 FR 6892 (February 15, 2018). SEC 2942 (06-19) VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00329 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.020</GPH> jbell on DSK3GLQ082PROD with RULES2 This cover page will be included for Form CRS (17 CFR 249.640) only. 33646 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations [Form ADV, Part 3: Instructions to Form CRS] 2 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 certain information about the firm. 3 Read all the General Instructions as well as the particular item requirements before preparing or updating the relationship summary. If you do not have any retail investors to whom you must deliver a relationship summary, you are not required to prepare or file one. See also Advisers Act rule 204-5; Exchange Act rule 17a14(a). 1. 2. Format. A. The relationship summary must include the required items enumerated below. The items require you to provide specific information. B. You must respond to each item and must provide responses in the same order as the items appear in these instructions. You may not include disclosure in the relationship summary other than disclosure that is required or permitted by these Instructions and the applicable item. C. You must make a copy of the relationship summary available upon request without charge. In paper format, the relationship summary for broker-dealers and investment advisers must not exceed two pages. For dual registrants that include their brokerage services and investment advisory services in one relationship summary, it must not exceed four pages in paper format. Dual registrants and affiliates that prepare separate relationship summaries are limited to two pages for each relationship summary. See General Instruction 5. You must use reasonable paper size, font size, and margins. If delivered electronically, the relationship summary must not exceed the equivalent of two pages or four pages in paper format, as applicable. Plain English; Fair Disclosure. A. 2 The items of the relationship summary are designed to promote effective communication between you and retail investors. Write your relationship summary in plain English, taking into consideration retail investors' level of The bracketed text will be included for Form ADV, Part 3 (17 CFR 279.1) only. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00330 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.021</GPH> jbell on DSK3GLQ082PROD with RULES2 Terms that are italicized in these instructions are defmed in General Instruction 11. Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33647 financial experience. You should include white space and implement other design features to make the relationship summary easy to read. The relationship summary should be concise and direct. Specifically: (i) use short sentences and paragraphs; (ii) use definite, concrete, everyday words; (iii) use active voice; (iv) avoid legal jargon or highly technical business terms unless you clearly explain them; and (v) avoid multiple negatives. You must write your response to each item as if you are speaking to the retail investor, using "you," "us," "our firm," etc. Note: The SEC's Office oflnvestor 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. All information in your relationship summary must be true and may not omit any material facts necessary in order to make the disclosures required by these Instructions and the applicable Item, in light of the circumstances under which they were made, not misleading. If a required disclosure or conversation starter is inapplicable to your business or specific wording required by these Instructions is inaccurate, you may omit or modify that disclosure or conversation starter. C. Responses must be factual and provide balanced descriptions to help retail investors evaluate your services. For example, you may not include exaggerated or unsubstantiated claims, vague and imprecise "boilerplate" explanations, or disproportionate emphasis on possible investments or activities that are not offered to retail investors. D. Broker-dealers and investment advisers have disclosure and reporting obligations under state and federal laws, including, but not limited to, obligations under the Exchange Act, the Advisers Act, and the respective rules thereunder. Brokerdealers are also subject to disclosure obligations under the rules of self-regulatory organizations. Delivery of the relationship summary will not necessarily satisfy the additional requirements that you have under the federal securities laws and regulations or other laws or regulations. Electronic And Graphical Formats. jbell on DSK3GLQ082PROD with RULES2 A. VerDate Sep<11>2014 You are encouraged to use charts, graphs, tables, and other graphics or text features in order to respond to the required disclosures. You are also encouraged to use text features, text colors, and graphical cues, such as dual-column charts, to compare services, account characteristics, investments, fees, and conflicts of interest. For a relationship summary that is posted on your website or otherwise provided electronically, we encourage online tools that populate information in comparison boxes based on investor selections. You also may include: (i) a means of facilitating access to video or audio messages, or other forms of information (whether by hyperlink, website address, Quick Response Code ("QR code"), or other equivalent methods or technologies); (ii) mouse-over windows; 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00331 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.022</GPH> 3. B. 33648 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations (iii) pop-up boxes; (iv) chat functionality; (v) fee calculators; or (vi) other forms of electronic media, communications, or tools designed to enhance a retail investor's understanding ofthe material in the relationship summary. VerDate Sep<11>2014 In a relationship summary that is posted on your website or otherwise provided electronically, you must provide a means of facilitating access to any information that is referenced in the relationship summary if the information is available online, including, for example, hyperlinks to fee schedules, conflicts disclosures, the firm's narrative brochure required by Part 2A of Form ADV, or other regulatory disclosures. In a relationship summary that is delivered in paper format, you may include URL addresses, QR codes, or other means of facilitating access to such information. C. Explanatory or supplemental information included in the relationship summary pursuant to General Instructions 3.A. or 3.B.: (i) must be responsive to and meet the requirements in these instructions for the particular Item in which the information is placed; and (ii) may 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. Formatting For Conversation Starters, Additional Information, and Standard of Conduct. A. For the "conversation starters" required by Items 2, 3, 4, and 5 below, you must use text features to make the conversation starters more noticeable and prominent in relation to other discussion text, for example, by: using larger or different font, a text box around the heading or questions; bolded, italicized or underlined text; or lines to offset the questions from the other sections. B. Investment advisers that provide only automated investment advisory services or broker-dealers that provide services only online without a particular individual with whom a retail investor can discuss these conversation starters must include a section or page on their website that answers each of the questions and must provide in the relationship summary a means of facilitating access to that section or page. If you provide automated investment advisory or brokerage services but also make a financial professional available to discuss your services with a retail investor, a financial professional must be available to discuss these conversation starters with the retail investor. C. For references to additional information regarding services, fees, and conflicts of interest required by Items 2.C., 3.A.(iii), and 3.B.(iv) below, you must use text features to make this information more noticeable and prominent in relation to other discussion text, for example, by: using larger or different font, a text box around the heading or questions, bolded, italicized or underlined text, or lines to offset the information from the other sections. A relationship summary provided 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00332 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.023</GPH> jbell on DSK3GLQ082PROD with RULES2 4. B. Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33649 electronically must include a hyperlink, QR code, or other means of facilitating access that leads directly to the relevant additional information. VerDate Sep<11>2014 Dual Registrants, Affiliates, and Additional Services. A. If you are a dual registrant, you are encouraged to prepare a single relationship summary discussing both your brokerage and investment advisory services. Alternatively, you may prepare two separate relationship summaries for brokerage services and investment advisory services. Whether you prepare a single relationship summary or two, you must present the brokerage and investment advisory information with equal prominence and in a manner that clearly distinguishes and facilitates comparison of the two types of services. If you prepare two separate relationship summaries, you must reference and provide a means of facilitating access to the other, and you must deliver to each retail investor both relationship summaries with equal prominence and at the same time, without regard to whether the particular retail investor qualifies for those retail services or accounts. B. If you are a broker-dealer or investment adviser and your affiliate also provides brokerage or investment advisory services to retail investors, you may prepare a single relationship summary discussing the services you and your affiliate provide. Alternatively, you may prepare separate relationship summaries for your services and your affiliate's services. (i) Whether you prepare a single relationship summary or separate relationship summaries, you must design them in a manner that presents the brokerage and investment advisory information with equal prominence and clearly distinguishes and facilitates comparison of the two types of services. (ii) If you prepare separate relationship summaries: 19:21 Jul 11, 2019 a. If a dually licensed financial professional provides brokerage and investment advisory services on behalf of you and your affiliate, you must deliver to each retail investor both your and your affiliate's relationship summaries with equal prominence and at the same time, without regard to whether the particular retail investor qualifies for those retail services or accounts. Each of the relationship summaries must reference and provide a means of facilitating access to the other. b. If General Instruction 5.B.(ii)(a) does not apply, you may choose whether or not to reference and provide a means of facilitating access to your affiliate's relationship summary and whether or not to deliver your and your affiliate 's relationship summaries to each retail investor with equal prominence and at the same time. Jkt 247001 PO 00000 Frm 00333 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.024</GPH> jbell on DSK3GLQ082PROD with RULES2 5. Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations C. 6. Preserving Records. A. 7. B. jbell on DSK3GLQ082PROD with RULES2 You must maintain records in accordance with Advisers Act rule 204-2(a)(14)(i) and/or Exchange Act rule 17a-4(e)(10), as applicable. Initial Filing and Delivery; Transition Provisions. A. VerDate Sep<11>2014 You may acknowledge other financial services that you provide in addition to your services as a broker-dealer or investment adviser registered with the SEC, such as insurance, banking, or retirement services, or investment advice pursuant to state registration or licensing. You may include references and means of facilitating access to additional information about those services. Information not pertaining to brokerage or investment advisory services may not, because of the nature, quantity, or manner of presentation, obscure or impede understanding of the information that must be included. See also General Instruction 3.C. Initial filing. (i) If you are an investment adviser and are required to deliver a relationship summary to a retail investor, you must file Form ADV, Part 3 (Form CRS) electronically with the Investment Adviser Registration Depository (lARD). If you are a registered broker-dealer and are required to deliver a relationship summary to a retail investor, you must file Form CRS electronically through the Central Registration Depository ("Web CRD®") operated by the Financial Industry Regulatory Authority, Inc. (FINRA). If you are a dual registrant and are required to deliver a relationship summary to one or more retail investor clients or customers of both your investment advisory and brokerage businesses, you must file using lARD and Web CRD®. You must file Form CRS using a textsearchable format with machine-readable headings. (ii) Information for investment advisers on how to file with lARD is available on the SEC's website at www.sec.gov/iard. Information for brokerdealers on how to file through Web CRD® is available on FINRA's website at https://www .finra.org/industry/web-crd/web-crd-system-links. Initial delivery. (i) Investment Advisers: If you are an investment adviser, you must deliver a relationship summary to each retail investor before or at the time you enter into an investment advisory contract with the retail investor. You must deliver the relationship summary even if your agreement with the retail investor is oral. See Advisers Act rule 204-5(b)(1 ). (ii) Broker-Dealers: If you are a broker-dealer, you must deliver a relationship summary to each retail investor, before or at the earliest of: (i) a recommendation of an account type, a securities transaction, or an investment strategy involving securities; (ii) placing an order for the retail 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00334 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.025</GPH> 33650 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33651 investor; or (iii) the opening of a brokerage account for the retail investor. See Exchange Act rule 17a-14(c)(1 ). (iii) Transition provisions for initial filing and delivery after the effective date of the new Form CRS requirements. (i) jbell on DSK3GLQ082PROD with RULES2 (ii) VerDate Sep<11>2014 Filings for Investment Advisers a. If you are already registered or have an application for registration pending with the SEC as an investment adviser before June 30, 2020 you must electronically file, in accordance with Instruction 7 .A. above, your initial relationship summary beginning on May 1, 2020 and by no later than June 30, 2020 either as: (1) an otherthan-annual amendment or (2) part of your initial application or annual updating amendment. See Advisers Act rules 203-1 and 204-1. b. If you file an application for registration with the SEC as an investment adviser on or after June 30, 2020, the Commission will not accept any initial application that does not include a relationship summary. See Advisers Act rule 203-1. Filings for Broker-Dealers a. If you are already registered with the SEC as a broker-dealer before June 30, 2020, you must electronically file, in accordance with Instruction 7 .A. above, your initial relationship summary beginning on May 1, 2020 and by no later than June 30, 2020. See Exchange Act rule 17a-14. b. If you file an application for registration or have an application pending with the SEC as a broker-dealer on or after June 30, 2020, you must file your relationship summary by no later than the date that your registration becomes effective. See Exchange Act rule 17a-14. (iii) Delivery to New and Prospective Clients and Customers: As ofthe date by which you are first required to electronically file your relationship summary with the SEC, you must begin to deliver your relationship summary to new and prospective clients and customers who are retail investors as required by Instruction 7.B. See Advisers Act rule 204-5 and Exchange Act rule 17a-14. (iv) Delivery to Existing Clients and Customers: Within 30 days after the date by which you are first required to electronically file your relationship 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00335 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.026</GPH> C. Dual Registrants: A dual registrant must deliver the relationship summary at the earlier of the timing requirements in General Instruction 7.B.(i) or (ii). 33652 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations summary with the SEC, you must deliver your relationship summary to each of your existing clients and customers who are retail investors. See Advisers Act rule 204-5 and Exchange Act rule 17a-14. 9. 10. Updating the Relationship Summary and Filing Amendments. A. You must update your relationship summary and file it in accordance with Instruction 7.A. above within 30 days whenever any information in the relationship summary becomes materially inaccurate. The filing must include an exhibit highlighting changes required by Instruction 8.C. below. B. You must communicate any changes in the updated relationship summary to retail investors who are existing clients or customers within 60 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 through another disclosure that is delivered to the retail investor. C. Each amended relationship summary that is delivered to a retail investor who is an existing client or customer must highlight the most recent changes by, for example, marking the revised text or including a summary of material changes. The additional disclosure showing revised text or summarizing the material changes must be attached as an exhibit to the unmarked amended relationship summary. Additional Delivery Requirements to Existing Clients and Customers. A. You must deliver the most recent relationship summary to a retail investor who is an existing client or customer before or at the time you: (i) open a new account that is different from the retail investor's existing account(s ); (ii) recommend that the retail investor roll over assets from a retirement account into a new or existing account or investment; or (iii) recommend or provide a new brokerage or investment advisory service or investment that does not necessarily involve the opening of a new account and would not be held in an existing account, for example, the first-time purchase of a direct-sold mutual fund or insurance product that is a security through a "check and application" process, i.e., not held directly within an account. B. You also must deliver the relationship summary to a retail investor within 30 days upon the retail investor's request. Electronic Posting and Manner of Delivery. jbell on DSK3GLQ082PROD with RULES2 A. VerDate Sep<11>2014 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. 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00336 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.027</GPH> 8. Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 11. 33653 B. You may deliver the relationship summary electronically, including updates, consistent with SEC guidance regarding electronic delivery, 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. You may 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 you or your financial professional consistent with SEC guidance, in particular Form CRS Relationship Summary; Amendments to Form ADV, which you can find at https://www.sec.gov/rules/final/20 19/34-86032.pdf. C. Ifthe relationship summary is delivered electronically, it must be presented prominently in the electronic medium, for example, as a direct link or in the body of an email or message, and must be easily accessible for retail investors. D. If the relationship summary is delivered in paper format as part of a package of documents, you must ensure that the relationship summary is the first among any documents that are delivered at that time. Definitions. VerDate Sep<11>2014 A. Affiliate: Any persons directly or indirectly controlling or controlled by you or under common control with you. B. Dually licensed financial professional: A natural person who is both an associated person of a broker-dealer registered under section 15 of the Exchange Act, as defined in section 3(a)(18) ofthe Exchange Act, and a supervised person of an investment adviser registered under section 203 of the Advisers Act, as defined in section 202(a)(25) of the Advisers Act. C. Dual registrant: A firm that is dually registered as a broker-dealer under section 15 of the Exchange Act and an investment adviser under section 203 of the Advisers Act and offers services to retail investors as both a broker-dealer and an investment adviser. For example, if you are dually registered and offer investment advisory services to retail investors, but offer brokerage services only to institutional investors, you are not a dual registrant for purposes of Form CRS and these Instructions. D. Relationship summary: A written disclosure statement prepared in accordance with these Instructions that you must provide to retail investors. See Advisers Act rule 204-5; Exchange Act rule 17a-14; Form CRS. E. Retail investor: A natural person, or the legal representative of such natural person, who seeks to receive or receives services primarily for personal, family or household purposes. 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00337 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.028</GPH> jbell on DSK3GLQ082PROD with RULES2 For purposes of Form CRS and these Instructions, the following terms have the meanings ascribed to them below: 33654 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations Item Instructions Item 1. Introduction Include the date prominently at the beginning ofthe relationship summary (e.g., in the header or footer of the first page or in a similar location for a relationship summary provided electronically). Briefly discuss the following information in an introduction: A. State your name and whether you are registered with the Securities and Exchange Commission as a broker-dealer, investment adviser, or both. Also indicate that brokerage and investment advisory services and fees differ and that it is important for the retail investor to understand the differences. You may also include a reference to FINRA or Securities Investor Protection Corporation membership in a manner consistent with other rules or regulations (e.g., FINRA rule 2210). B. State that free and simple tools are available to research firms and financial professionals at Investor.gov/CRS, which also provides educational materials about broker-dealers, investment advisers, and investing. Item 2. Relationships and Services A. Use the heading: "What investment services and advice can you provide me?" B. Description of Services: State that you offer brokerage services, investment advisory services, or both, to retail investors, and summarize the principal services, accounts, or investments you make available to retail investors, and any material limitations on such services. For broker-dealers, state the particular types of principal brokerage services you offer to retail investors, including buying and selling securities, and whether or not you offer recommendations to retail investors. For investment advisers, state the particular types of principal investment advisory services you offer to retail investors, including, for example, financial planning and wrap fee programs. VerDate Sep<11>2014 (i) Monitoring: Explain whether or not you monitor retail investors' investments, including the frequency and any material limitations. If so, indicate whether or not the services described in response to this Item 2.B.(i) are offered as part of your standard services. (ii) Investment Authority: For investment advisers that accept discretionary authority, describe those services and any material limitations on that authority. Any such summary must include the specific circumstances that would trigger this authority and any material limitations on that authority (e.g., length of time). For investment advisers that offer nondiscretionary services and broker-dealers, explain that the retail investor makes the ultimate decision regarding the purchase or sale of investments. 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00338 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.029</GPH> jbell on DSK3GLQ082PROD with RULES2 In your description you must address the following: Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33655 Broker-dealers may, but are not required to state whether you accept limited discretionary authority. (iii) Limited Investment Offerings: Explain whether or not you make available or offer advice only with respect to proprietary products, or a limited menu of products or types of investments, and if so, describe these limitations. (iv) Account Minimums and Other Requirements: Explain whether or not you have any requirements for retail investors to open or maintain an account or establish a relationship, such as minimum account size or investment amount. C. Additional Information: Include specific references to more detailed information about your services that, at a minimum, include the same or equivalent information to that required by the Form ADV, Part 2A brochure (Items 4 and 7 of Part 2A or Items 4.A. and 5 of Part 2A Appendix 1) and Regulation Best Interest, as applicable. If you are a broker-dealer that does not provide recommendations subject to Regulation Best Interest, to the extent you prepare more detailed information about your services, you must include specific references to such information. You may include hyperlinks, mouse-over windows, or other means of facilitating access to this additional information and to any additional examples or explanations of such services. D. Conversation Starters: Include the following additional questions for a retail investor to ask a financial professional and start a conversation about relationships and services: VerDate Sep<11>2014 (i) If you are a broker-dealer and not a dual registrant, include: "Given my financial situation, should I choose a brokerage service? Why or why not?" (ii) If you are an investment adviser and not a dual registrant, include: "Given my financial situation, should I choose an investment advisory service? Why or why not?" (iii) If you are a dual registrant, include: "Given my financial situation, should I choose an investment advisory service? Should I choose a brokerage service? Should I choose both types of services? Why or why not?" (iv) "How will you choose investments to recommend to me?" (v) "What is your relevant experience, including your licenses, education and other qualifications? What do these qualifications mean?'' 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00339 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.030</GPH> jbell on DSK3GLQ082PROD with RULES2 Note: If you are a broker-dealer offering recommendations, you should consider the applicability of the Investment Advisers Act of 1940, consistent with SEC guidance. 33656 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations Fees, Costs, Conflicts, and Standard of Conduct Item 3. A. Use the heading: "What fees will I pay?" (i) Description ofPrincipal Fees and Costs: Summarize the principal fees and costs that retail investors will incur for your brokerage or investment advisory services, including how frequently they are assessed and the conflicts of interest they create. a. Broker-dealers must describe their transaction-based fees. With respect to addressing conflicts of interest, a broker-dealer could, for example, include a statement that a retail investor would be charged more when there are more trades in his or her account, and that the firm may therefore have an incentive to encourage a retail investor to trade often. b. Investment advisers must describe their ongoing asset-based fees, fixed fees, wrap fee program fees, or other direct fee arrangement. The principal fees for investment advisory services should align with the type offee(s) that you report in response to Form ADV Part 1A, Item 5.E. (1) Include information about each type of fee you report in Form ADV that is responsive to this Item 3.A. Investment advisers with wrap fee program fees are encouraged to explain that asset-based fees associated with the wrap fee program will include most transaction costs and fees to a broker-dealer or bank that has custody of these assets, and therefore are higher than a typical asset-based advisory fee. (2) With respect to addressing conflicts of interest, an investment adviser that charges an asset-based fee could, for example, include a statement that the more assets there are in a retail investor's advisory account, the more a retail investor will pay in fees, and the firm may therefore have an incentive to encourage the retail investor to increase the assets in his or her account. Note: If you receive compensation in connection with the purchase or sale of securities, you should carefully consider the applicability of the broker-dealer registration requirements of the Securities Exchange Act of 1934 and any applicable state securities statutes. VerDate Sep<11>2014 19:21 Jul 11, 2019 Description of Other Fees and Costs: Describe other fees and costs related to your brokerage or investment advisory services and investments in addition to the firm's principal fees and costs disclosed in Item 3.A.(i) that the retail investor will pay directly or indirectly. List examples of the Jkt 247001 PO 00000 Frm 00340 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.031</GPH> jbell on DSK3GLQ082PROD with RULES2 (ii) Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33657 categories of the most common fees and costs applicable to your retail investors (e.g., custodian fees, account maintenance fees, fees related to mutual funds and variable annuities, and other transactional fees and product-level fees). Additional Information: State "You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investments over time. Please make sure you understand what fees and costs you are paying." You must include specific references to more detailed information about your fees and costs that, at a minimum, include the same or equivalent information to that required by the Form ADV, Part 2A brochure (specifically Items 5.A., B., C., and D.) and Regulation Best Interest, as applicable. If you are a broker-dealer that does not provide recommendations subject to Regulation Best Interest, to the extent you prepare more detailed information about your fees and costs, you must include specific references to such information. You may include hyperlinks, mouse-over windows, or other means of facilitating access to this additional information and to any additional examples or explanations of such fees and costs included in response to Item 3.A.(i) or (ii). (iv) Conversation Starter: Include the following question for a retail investor to ask a financial professional and start a conversation about the impact of fees and costs on investments: "Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?" If you are a broker-dealer, use the heading: "What are your legal obligations to me when providing recommendations? How else does your firm make money and what conflicts of interest do you have?" Ifyou are an investment adviser, use the heading: "What are your legal obligations to me when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?" If you are a dual registrant that prepares a single relationship summary, use the heading: "What are your legal obligations to me when providing recommendations as my broker-dealer or when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?" (i) Standard of Conduct. jbell on DSK3GLQ082PROD with RULES2 a. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 If you are a broker-dealer that provides recommendations subject to Regulation Best Interest, include (emphasis required): "When we provide you with a recommendation, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because PO 00000 Frm 00341 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.032</GPH> B. (iii) 33658 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations they can affect the recommendations we provide you. Here are some examples to help you understand what this means." If you are a broker-dealer that does not provide recommendations subject to Regulation Best Interest, include (emphasis required): "We do not provide recommendations. The way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the services we provide you. Here are some examples to help you understand what this means." VerDate Sep<11>2014 If you are an investment adviser, include (emphasis required): "When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the investment advice we provide you. Here are some examples to help you understand what this means." c. If you are a dual registrant that prepares a single relationship summary and you provide recommendations subject to Regulation Best Interest as a broker-dealer, include (emphasis required): "When we provide you with a recommendation as your brokerdealer or act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the recommendations and investment advice we provide you. Here are some examples to help you understand what this means." If you are a dual registrant that prepares a single relationship summary and you do not provide recommendations subject to Regulation Best Interest as a brokerdealer, include (emphasis required): "We do not provide recommendations as your broker-dealer. When we act as your investment adviser, we have to act in your best interest and not put our interests ahead of yours. At the same time, the way we make money creates some conflicts with your interest. You should understand and ask us about these conflicts because they can affect the services and investment advice we provide you. Here are some examples to help you understand what this means." If you are a dual registrant that prepares two separate relationship summaries, follow the instructions for broker-dealers and investment advisers in Items 3.B., 3.B.(i).a., and 3.B.(i).b. Examples ofWays You Make Money and Conflicts ofInterest: If applicable to you, summarize the following other ways in which you and your affiliates make money from brokerage or investment advisory 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00342 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.033</GPH> jbell on DSK3GLQ082PROD with RULES2 (ii) b. Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33659 services and investments you provide to retail investors. If none ofthese conflicts applies to you, summarize at least one other material conflict of interest that affects retail investors. Explain the incentives created by each of these examples. VerDate Sep<11>2014 Proprietary Products: Investments that are issued, sponsored, or managed by you or your affiliates. b. Third-Party Payments: Compensation you receive from third parties when you recommend or sell certain investments. c. Revenue Sharing: Investments where the manager or sponsor of those investments or another third party (such as an intermediary) shares with you revenue it earns on those investments. d. Principal Trading: Investments you buy from a retail investor, and/or investments you sell to a retail investor, for or from your own accounts, respectively. (iii) Conversation Starter: Include the following question for a retail investor to ask a financial professional and start a conversation about conflicts of interest: "How might your conflicts of interest affect me, and how will you address them?" (iv) Additional Information: You must include specific references to more detailed information about your conflicts of interest that, at a minimum, include the same or equivalent information to that required by the Form ADV, Part 2A brochure and Regulation Best Interest, as applicable. If you are a broker-dealer that does not provide recommendations subject to Regulation Best Interest, to the extent you prepare more detailed information about your conflicts, you must include specific references to such information. You may include hyperlinks, mouse-over windows, or other means of facilitating access to this additional information and to any additional examples or explanations of such conflicts of interest. Use the heading: "How do your financial professionals make money?" (i) Description ofHow Financial Professionals Make Money: Summarize how your financial professionals are compensated, including cash and non-cash compensation, and the conflicts of interest those payments create. (ii) Required Topics in the Description: Include, to the extent applicable, whether your financial professionals are compensated based on factors such as: the amount of client assets they service; the time and complexity required to meet a client's needs; the product sold (i.e., differential compensation); product sales commissions; or revenue the firm earns from the financial professional's advisory services or recommendations. 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00343 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.034</GPH> jbell on DSK3GLQ082PROD with RULES2 C. a. 33660 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations Item 4. Disciplinary History A. Use the heading: "Do you or your financial professionals have legal or disciplinary history?" B. State "Yes" if you or any of your financial professionals currently disclose, or are required to disclose, the following information: (ii) Legal or disciplinary history in your Form BD (Items 11 A-K) (except to the extent such information is not released to BrokerCheck, pursuant to FINRA Rule 8312). (iii) 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 7A or 7C-F of Form US (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). State "No" if neither you nor any of your financial professionals currently discloses, or is required to disclose, the information listed in Item 4.B. D. Regardless of your response to Item 4.B, you must: (i) Search Tool: Direct the retail investor to visit Investor.gov/CRS for a free and simple search tool to research you and your financial professionals. (ii) Conversation Starter: Include the following questions for a retail investor to ask a financial professional and start a conversation about the financial professional's disciplinary history: "As a financial professional, do you have any disciplinary history? For what type of conduct?" Additional Information A. State where the retail investor can find additional information about your brokerage or investment advisory services and request a copy of the relationship summary. This information should be disclosed prominently at the end of the relationship summary. B. Include a telephone number where retail investors can request up-to-date information and request a copy of the relationship summary. C. Conversation Starter: Include the following questions for a retail investor to ask a financial professional and start a conversation about the contacts and complaints: "Who is my primary contact person? Is he or she a representative of an investment adviser or a broker-dealer? Who can I talk to ifl have concerns about how this person is treating me?" 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00344 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.035</GPH> jbell on DSK3GLQ082PROD with RULES2 Disciplinary information in your Form ADV (Item 11 of Part 1A or Item 9 of Part 2A). C. Item 5. VerDate Sep<11>2014 (i) Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33661 APPENDIXC Feedback Forms Comment Summary The Proposing Release, at Appendix F, provided investors seeking to comment on the relationship summary a form with standardized questions for providing their feedback. The Appendix F form could be completed electronically on our website. As of June 4, 2019, 93 individuals provided a relevant response or comment answering at least one question on this form (a "responsive" answer.). 1 About 50% (47) were completed electronically using the on-line version ofthe form on our website. 2 Other commenters (46) submitted a downloaded and completed copy of the form to the comment file in a .pdf file or submitted a completed a copy of the form at one of our investor roundtables. 3 This Appendix reports the staffs summary of the 93 comments provided using the Appendix F form with a responsive answer to one or more questions (the "Feedback Forms"). Some questions called for a "structured" response (e.g., Question 2 asks commenters to indicate whether specific sections of the relationship summary are: "very useful," "useful," "not useful" or "unsure"). For these questions, the Feedback Forms are summarized from the structured question options. Other questions requested a narrative response and, for these questions, the Feedback Forms are summarized from the sentiment of these narrative answers. Question 1: Overall do you find the Relationship Summary useful? If not, how would you change it? If so, what topics and how can they be improved? Question 1 requested a narrative answer. 70 (over 70%) of individuals who submitted the Feedback Forms indicated in narrative answers in Question 1 or to other questions that they found the relationship summary to be useful. Among those who indicated that they found the document overall to be useful, many suggested ways to improve the document. For example, 41 noted that some topics are too technical or otherwise need improvement in response to Question 4 or in other comments, 48 suggested additional information in response to Question 5 or in other comments; and 27 indicated that the document should be shorter in response to Question 6 or in other comments. Also, many indicated that they did not find the relationship summary entirely easy to read and follow (33 commenters (35%) answered "Somewhat" or "No" in either of Question 3(a) (Do you find the format of the Relationship Summary easy to follow?) or Question 3(c) (Is the Relationship Summary easy to read?). A few individuals used the on-line version of the Appendix F form to provide comments on other topics and did not provide any responses or comments relevant to any of the form's questions. These non-responsive comment documents are not included in this summary. 2 Feedback forms completed on line and included in this summary are at listed at Endnote 1. 3 Feedback forms submitted to the comment file on a downloaded and completed copy of the Feedback form or at one of our investor roundtables that are included in this summary are listed at Endnote 2. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00345 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.037</GPH> jbell on DSK3GLQ082PROD with RULES2 1 33662 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 9 (about 10%) indicated that they did not find the relationship summary to be useful. The remaining responses to this question did not express a clear sentiment. Question Q2(a): How useful is the Type of Relationship and Service section of the Relationship Summary ?4 Very Useful 41 (44%) Useful 41 (44%) Not Useful 5 (5%) Unsure 4 (4%) No Response 2 (2%) Question Q2(b): How useful is the Our Obligations to You section of the Relationship Summary? Very Useful 36 (39%) Useful 42 (45%) Not Useful 7 (8%) Unsure 4 (4%) No Response 4 (4%) Question Q2(c): How useful is the Fees and Costs section of the Relationship Summary? Very Useful 33 (35%) Useful 43 (46%) Not Useful 8 (9%) Unsure 6 (6%) No Response 3 (3%) Question Q2(d): How useful is the Comparison to different account types section of the Relationship Summary? Very Useful 29 (31%) Useful 39 (42%) Not Useful 6 (6%) Unsure 11 (12%) No Response 8 (9%) Percentages reported in tables summarized responses to Questions 2 and 3 are based on the total number of Feedback Forms. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00346 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.038</GPH> jbell on DSK3GLQ082PROD with RULES2 4 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33663 Question Q2(e): How useful is the Conflict of Interests section of the Relationship Summary? Very Useful 39 (42%) Useful 30 (32%) Not Useful 10 (11%) Unsure 10 (11%) No Response 4 (4%) Question Q2(f): How useful is the Additional Information section of the Relationship Summary? Very Useful 30 (32%) Useful 35 (38%) Not Useful 10 (11%) Unsure 10 (11%) No Response 8 (9%) Question Q2(g): How useful is the Key Questions to Ask section of the Relationship Summary? Very Useful 51 (55%) Useful 28 (30%) Not Useful 7 (8%) Unsure 3 (3%) No Response 4 (4%) Question Q3 (a): Do you find the format of the Relationship Summary easy to follow? Yes 58 (62%) Somewhat 24 (26%) No 7 (8%) No Response 4 (4%) Question Q3(b): Is the information in the appropriate order? Yes 57 (61%) Somewhat 26 (28%) No 7 (8%) No Response 3 (3%) Question Q3(c): Is the Relationship Summary easy to read? VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Somewhat 23 (25%) Frm 00347 Fmt 4701 No 10 (11%) Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.039</GPH> jbell on DSK3GLQ082PROD with RULES2 Yes 55 (59%) No Response 5 (5%) 33664 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations Question Q3(d): Should the Relationship Summary include additional information about different account types? No Response Yes Somewhat No 49 9 29 6 (6%) (53%) (10%) (31%) Question Q3(e): Would you seek out additional information about a firm's disciplinary history as suggested in the Relationship Summary? Yes 65 (70%) Somewhat 14 (15%) No 10 (11%) No Response 4 (4%) Question 4: Are there topics in the Relationship Summary that are too technical or that could be improved? Question 4 requested a narrative answer. Narrative answers offered by 25 (more than 25% of Feedback Forms) specifically stated that the relationship summary was not too technical. On 27 Feedback Forms (about 30%), commenters did not respond to Question 4 or offered an answer that did not address this question. Among these 27, 13 appeared to fully agree that relationship summary format was easy to follow and the relationship summary was easy to read by checking "yes" in response to Question 3(a) (Do you find the format of the Relationship Summary easy to follow?) and Question 3(c) (Is the Relationship Summary easy to read?). Overall, 45 commenters (48%) on Feedback Forms fully agreed that the relation summary is easy to read and follow by checking "yes" in response to Question 3(a) ("Do you find the format of the Relationship Summary easy to follow") and Question 3(c) ("Is the Relationship Summary easy to read?). VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00348 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.040</GPH> jbell on DSK3GLQ082PROD with RULES2 On 41 of the Feedback Forms (44% of93 Feedback Forms), the narrative response to Question 4 or other comments on the Feedback Form indicated that the relationship summary was too technical or suggested one or more topics that could be improved. Across all Feedback Forms (including those with comments indicating that the relationship summary was not too technical): • 20 Feedback Forms included comment indicating that the relationship summary language was generally too technical, wordy or confusing, or should be made simpler; • 23 Feedback Forms included narrative comments indicating that information about fees and costs was too technical or needed to be more clear, including seven (7) that asked for definitions ofterms such as transaction-based fee, asset-based fee or wrap fee; • 23 Feedback Forms included narrative comments suggesting that information in sections covering relationships and services and the obligations of financial professionals needed clarification, including ten (10) Feedback Forms that asked for a definition or better explanation of the term "fiduciary"; and Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations • 33665 14 Feedback Forms included narrative comments suggesting clarification or more information about conflicts of interest. Question 5: Is there additional information that we should require in the Relationship Summary, such as more specific information about the form 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? Question 5 requested a narrative answer. 48 ofthe Feedback Forms (more than 50%) included comments suggesting additional information that could be required in response to Question 5 or another question on the Feedback Form. Many (29) indicated that additional information about fees and costs would be helpful. On 13 of the Feedback Forms (about 14%) narrative comments responding to Question 5 indicated that no additional information was needed. On the remainder of Feedback Forms (32, over 30% of Feedback Forms), there was no answer given or the answer given was not relevant to Question 5. Question 6: Is the Relationship Summary an appropriate length? If not, should it be longer or shorter? Question 6 requested a narrative answer. 37 narrative answers responding to Question 6 or another question (about 40% of93 Feedback Forms) specifically indicated that the relationship summary's length is appropriate. 27 of the Feedback Forms (about 30%) included comments suggesting that the relationship summary should be shorter. Two commenters suggested that the form should be longer. On the remainder of Feedback Forms (27, or almost 30%), there was no answer given or the answer given was not relevant to Question 6. Question 7: Do you find the 'Key Questions to Ask' useful? Would the questions improve the quality ofyour discussion with your financial professional? If not, why not? Question 7 requested a narrative answer. Responses on 77 (over 75%) of Feedback Forms indicated that the Key Questions were useful ("useful" and "very useful" answers to Question 2(g) are included, if there was no answer provided to Question 7). 11 Feedback Forms (about 12%) included specific comments agreeing that the Key Questions would encourage discussions with financial professionals. Another two (2) included a comment agreeing that, in general, the relationship summary could encourage dialogue between financial professionals and clients. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00349 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.041</GPH> jbell on DSK3GLQ082PROD with RULES2 Several commenters (8) suggested moving the Key Questions to the beginning or closer to the beginning ofthe relationship summary, or including the Key Questions within individual sections, rather than placing the key questions at the end of the document. 33666 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00350 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.042</GPH> jbell on DSK3GLQ082PROD with RULES2 Endnotes: [1] Feedback forms completed on-line and included in this summary: Fors Anderson, 3/17/2019, https://www.sec.gov/comments/s7-08-18/s70818-5134364-183356.htm ("Anderson Feedback Form"), Sylva Baker, 8/6/2018, https://www.sec.gov/comments/s7-08-18/s70818-4170945172084.pdf ("Baker Feedback Form"); Linda Baumbusch, 7/29/2018, https://www.sec.gov/comments/s7-08-18/s70818-4133141-171850.htm ("Baumbusch Feedback Form"); Mahesh Bhupalam, 7/18/2018, https://www.sec.gov/comments/s7-08-18/s708184069296-169437.htm ("Bhupalam Feedback Form"); Hugh Caddess, 7/23/2018, https://www.sec.gov/comments/s7-08-18/s70818-4097528-170159.htm("Caddess Feedback Form"); Paul Calderon, 7/30/2018, https://www.sec.gov/comments/s7-08-18/s70818-4140254171938.htm("Calderon Feedback Form"); Robert Carr, 7/10/2018, https://www.sec.gov/comments/s7-08-18/s70818-4024224-167344.htm ("Carr Feedback Form"); Rod Carroll, 7/10/2018m, https://www.sec.gov/comments/s7-08-18/s70818-4029201167352.htm ("Carroll Feedback Form"); Charles Christine, 6/22/2018, https://www.sec.gov/comments/s7-08-18/s70818-391 0620-166661.htm("Christine Feedback Form"); Lloyd Coleman, 7117/2018, https://www.sec.gov/comments/s7-08-18/s70818-4063665169130.htm ("Coleman Feedback Form"); Janice Daunheimer, 8/7/2018, https://www.sec.gov/comments/s7-08-18/s70818-4185205-172598.htm ("Daunheimer Feedback Form"); Juanita Fontaine, 7/21/2018, https://www.sec.gov/comments/s7-08-18/s70818-4096751170113.htm ("Fontaine Feedback Form"); Frederick Greene, 7113/2018, https://www.sec.gov/comments/s7-08-18/s70818-4044546-168910.htm ("Greene Feedback Form"); Chester Hawkins, 8/1/2018, https://www.sec.gov/comments/s7-08-18/s70818-4171653172230.htm ("Hawkins Feedback Form"); Anthony Hicks, 7/20/2018, https://www.sec.gov/comments/s7-08-18/s70818-4096231-170 102.htm ("Hicks Feedback Form"); Jeffrey T., 7/10/2018, https://www.sec.gov/comments/s7-08-18/s70818-4024265167345.htm ("Jeffrey Feedback Form"); Mike Keeler, 7110/2018, https://www.sec.gov/comments/s7-08-18/s70818-4024769-167348.htm ("Keeler Feedback Form"); Duane Lee, 12/3/2018, https://www.sec.gov/comments/s7-08-18/s70818-4719639176708.htm ("Lee2 Feedback Form"); George Macke, 6/2/2018, https://www.sec.gov/comments/s7-08-18/s70818-3768103-162690.htm ("Macke Feedback Form"); Mary Malone, 7115/2018, https://www.sec.gov/comments/s7-08-18/s70818-4048232168957.htm ("Malone Feedback Form"); Mary Margolis, MBR Financial, 6/28/2018, https://www.sec.gov/comments/s7-08-18/s70818-3974252-167135.htm ("Margolis Feedback Form"); Darren Markle, 7/6/2018, https://www.sec.gov/comments/s7-08-18/s70818-4008397167254.htm ("Markle Feedback Form"); Chelsea Matvey, 7/19/2018, https://www.sec.gov/comments/s7-08-18/s70818-4078676-169821.htm ("Matvey Feedback Form"); Kevin McGuire, 7117/2018, https://www.sec.gov/comments/s7-08-18/s70818-4063664169164.htm ("McGuire Feedback Form"); Jennifer Mellgren, 7/22/2018, https://www.sec.gov/comments/s7-08-18/s70818-4097514-170157.htm ("Mellgren Feedback Form"); Robert Mennella, 8/22/2018, https://www.sec.gov/comments/s7-08-18/s708184251004-173033.htm ("Mennella Feedback Form"); Steven Miller, 7/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-4065013-169285.htm ("Miller Feedback Form"); Bob Murphy, 7/25/2018, https://www.sec.gov/comments/s7-08-18/s70818-4111730170372.htm ("Murphy Feedback Form"); Mary Newton, 7/10/2018, https://www.sec.gov/comments/s7-08-18/s70818-4024770-167347.htm ("Newton Feedback Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations 33667 VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00351 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.043</GPH> jbell on DSK3GLQ082PROD with RULES2 Form"); Jon Panitzke, 7/23/2018, https://www.sec.gov/comments/s7-08-18/s70818-4105327170265.htm ("Panitzke Feedback Form"); Marcus Paredes, 7110/2018, https://www.sec.gov/comments/s7-08-18/s70818-4024691-167346.htm ("Panitzke Feedback Form"); Huelien Pham, 7118/2018, https://www.sec.gov/comments/s7-08-18/s70818-4069312169440.htm ("Pham Feedback Form"); Loizos Prodromou, 7/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-4064613-169273.htm ("Prodromou Feedback Form"); Richard Rohr, 6/22/2018, https://www.sec.gov/comments/s7-08-18/s70818-3910614166660.htm ("Rohr Feedback Form"); Kathy Sachs, 7/23/2018, https://www.sec.gov/comments/s7-08-18/s70818-4105119-170257.htm ("Sachs Feedback Form"); Richard Salkowitz, 7119/2018, https://www.sec.gov/comments/s7-08-18/s708184078450-169772.htm ("Salkowitz Feedback Form"); Dwight Sanders, 6/8/2018, https://www.sec.gov/comments/s7-08-18/s70818-3816823-162750.htm ("Sanders1Feedback Form"); Dr. Dwight Sanders, 6/30/2018, https://www.sec.gov/comments/s7-08-18/s708183985541-167075.htm ("Sanders2 Feedback Form"); Daniel Schuman, 7/20/2018, https://www.sec.gov/comments/s7-08-18/s70818-4096425-170103.htm ("Schuman Feedback Form"); Ron Shepherd, 6/20/2018, https://www.sec.gov/comments/s7-08-18/s70818-3900517162957.htm ("Shepherd Feedback Form"); Pat Smith, 7/24/2018, https://www.sec.gov/comments/s7-08-18/s70818-4110731-170363.htm ("Smith1 Feedback Form"); Joe Smith, 8/6/2018, https://www.sec.gov/comments/s7-08-18/s70818-4173957172348.htm ("Smith2 Feedback Form"); Star Identifier, 11/5/2018, https://www.sec.gov/comments/s7-08-18/s70818-4611472-176365.htm ("Star Feedback Form"); Cyril Anouar Streit, 9/10/2018, https://www.sec.gov/comments/s7-08-18/s70818-4445712173232.htm ("Streit Feedback Form"); Jay Thompson, 7/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-4069295-169419 .htm ("Thompson Feedback Form"); Brenda Winslow, 6/6/2018, https://www.sec.gov/comments/s7-08-18/s70818-3784415162708.htm ("Winslow Feedback Form"); Mark Winsor, 7/21/2018, https://www.sec.gov/comments/s7-08-18/s70818-4096783-170118.htm ("Winsor Feedback Form"). [2] Feedback Forms filed in the comment file in .pdf format: Anonymous, 6/15/2018, https://www.sec.gov/comments/s7-08-18/s70818-3857882-162788.pdf ("Anonymous01 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7 -08-18/s708183898398-162931.pdf ("Anonymous02 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3898681-162940.pdf ("Anonymous03 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s708183 897774-16293 0. pdf("Anonymous04 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3898814-162941.pdf ("Anonymous05 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7 -08-18/s70818389770 1-162929 .pdf ("Anonymous06 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3899032-162942.pdf ("Anonymous07 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s708183 897489-162926.pdf ("Anonymous08 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3898137-162934.pdf ("Anonymous09 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7 -08-18/s708183 898482-16293 7 .pdf ("Anonymous 10 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3897632-162927 .pdf ("Anonymous11 33668 Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 PO 00000 Frm 00352 Fmt 4701 Sfmt 4725 E:\FR\FM\12JYR2.SGM 12JYR2 ER12JY19.044</GPH> jbell on DSK3GLQ082PROD with RULES2 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s708183898148-162936.pdf ("Anonymous 12 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3898590-162939.pdfv ("Anonymous13 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7 -08-18/s708183898570-162938.pdf, ("Anonymous14 Feedback Form"); Anonymous, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3897651-162928.pdf ("Anonymous15 Feedback Form"); Anonymous, 7110/2018, https://www.sec.gov/comments/s7-08-18/s708184030385-167421.pdf("Anonymous16 Feedback Form"); Anonymous, 7110/2018, https://www.sec.gov/comments/s7-08-18/s70818-4030375-167399.pdf ("Anonymous17 Feedback Form"); Anonymous, 7110/2018, https://www.sec.gov/comments/s7 -08-18/s708184030330-167397.pdf("Anonymous18 Feedback Form"); Anonymous, 7110/2018, https://www.sec.gov/comments/s7-08-18/s70818-4030369-167398.pdf ("Anonymous19 Feedback Form"); Anonymous, 7110/2018, https://www.sec.gov/comments/s7-08-18/s708184030378-167420.pdf("Anonymous20 Feedback Form"); Anonymous, 7110/2018, https://www.sec.gov/comments/s7-08-18/s70818-4030325-167411.pdf ("Anonymous21 Feedback Form"); Anonymous, 7117/2018, https://www.sec.gov/comments/s7-08-18/s708184345352-173277.pdf("Anonymous22 Feedback Form"); Anonymous, 7117/2018, https://www.sec.gov/comments/s7-08-18/s70818-4345314-173293.pdf ("Anonymous23 Feedback Form"); Anonymous, 7117/2018, https://www.sec.gov/comments/s7-08-18/s708184345453-173280.pdf ("Anonymous24 Feedback Form"); Anonymous, 7/17/2018, https://www.sec.gov/comments/s7-08-18/s70818-4345356-173278.pdf ("Anonymous25 Feedback Form"); Anonymous, 7117/2018, https://www.sec.gov/comments/s7-08-18/s708184345378-173279.pdf("Anonymous26 Feedback Form"); Anonymous, 7117/2018, https://www.sec.gov/comments/s7-08-18/s70818-4345323-173294.pdf ("Anonymous27 Feedback Form"); Anonymous, 8/6/2018, https://www.sec.gov/comments/s7-08-18/s708184287928-173164.pdf ("Anonymous28 Feedback Form"); Anonymous, 9/27/2018, https://www.sec.gov/comments/s7-08-18/s70818-4447388-175712.pdf) ("Anonymous29 Feedback Form"); Leo Asen, 8/4/2018, https://www.sec.gov/comments/s7-08-18/s708184171811-172312.pdf ("Asen Feedback Form"); Lee Baird, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3899545-162952.pdf ("Baird Feedback Form"); MT Bowling, 6/1/2018, https://www.sec.gov/comments/s7-08-18/s70818-3757598162619.pdf("Bowling Feedback Form"); Mike Brantley, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3899574-162955.pdf("Brantley Feedback Form"); James Davis, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3899432162948.pdf ("Davis Feedback Form"); George Durgin, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3899422-162947.pdf("Durgin Feedback Form"); Brain Hobbes, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3899428162945.pdf("Hobbes Feedback Form"); Karean Hoggan, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3899522-162951.pdf("Hoggan Feedback Form"); Joker Jenkins, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3899511-162950.pdf ("Jenkins Feedback Form"); Jennifer Lee 4/28/2018, https://www.sec.gov/comments/s7-08-18/s70818-3551103162323.pdf ("Lee1 Feedback Form"); Angela Montellano, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3897484-162925.pdf("Montellano Feedback Form"); Don Parsons, 6/18/2018, https://www.sec.gov/comments/s7-08-18/s70818-3899387- Federal Register / Vol. 84, No. 134 / Friday, July 12, 2019 / Rules and Regulations BILLING CODE 8011–01–C SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 276 [Release No. IA–5248; File No. S7–07–18] RIN 3235–AM36 Commission Interpretation Regarding Standard of Conduct for Investment Advisers Securities and Exchange Commission. ACTION: Interpretation. AGENCY: The Securities and Exchange Commission (the ‘‘SEC’’ or the ‘‘Commission’’) is publishing an interpretation of the standard of conduct for investment advisers under the Investment Advisers Act of 1940 (the ‘‘Advisers Act’’ or the ‘‘Act’’). DATES: Effective July 12, 2019. FOR FURTHER INFORMATION CONTACT: Olawale´ Oriola, Senior Counsel; Matthew Cook, Senior Counsel; or Jennifer Songer, Branch Chief, at (202) 551–6787 or IArules@sec.gov, Investment Adviser Regulation Office, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–8549. SUPPLEMENTARY INFORMATION: The Commission is publishing an interpretation of the standard of conduct for investment advisers under the Advisers Act [15 U.S.C. 80b].1 SUMMARY: Table of Contents jbell on DSK3GLQ082PROD with RULES2 I. Introduction A. Overview of Comments 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 of the United States Code, 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. VerDate Sep<11>2014 19:21 Jul 11, 2019 Jkt 247001 II. Investment Advisers’ Fiduciary Duty A. Application of Duty Determined by Scope of Relationship B. Duty of Care 1. Duty To Provide Advice That Is in the Best Interest of the Client 2. Duty To Seek Best Execution 3. Duty To Provide Advice and Monitoring Over the Course of the Relationship C. Duty of Loyalty III. Economic Considerations A. Background B. Potential Economic Effects I. Introduction Under federal law, an investment adviser is a fiduciary.2 The fiduciary duty an investment adviser owes to its client under the Advisers Act, which comprises a duty of care and a duty of loyalty, is important to the Commission’s investor protection efforts. Also important to the Commission’s investor protection efforts is the standard of conduct that a brokerdealer owes to a retail customer when it makes a recommendation of any securities transaction or investment strategy involving securities.3 Both 2 SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (‘‘SEC v. Capital Gains’’); see also infra footnotes 34–44 and accompanying text; Investment Adviser Codes of Ethics, Investment Advisers Act Release No. 2256 (July 2, 2004); Compliance Programs of Investment Companies and Investment Advisers, Investment Advisers Act Release No. 2204 (Dec. 17, 2003); Electronic Filing by Investment Advisers; Proposed Amendments to Form ADV, Investment Advisers Act Release No. 1862 (Apr. 5, 2000). Investment advisers also have antifraud liability with respect to prospective clients under section 206 of the Advisers Act. 3 See Regulation Best Interest, Exchange Act Release No. 34–86031 (June 5, 2019) (‘‘Reg. BI Adoption’’). This final interpretation regarding the standard of conduct for investment advisers under the Advisers Act (‘‘Final Interpretation’’) interprets section 206 of the Advisers Act, which is applicable to both SEC- and state-registered investment advisers, as well as other investment advisers that are exempt from registration or subject to a prohibition on registration under the Advisers Act. This Final Interpretation is intended to highlight the principles relevant to an adviser’s fiduciary duty. It is not, however, intended to be the exclusive resource for understanding these principles. Separately, in various circumstances, case law, statutes (such as the Employee Retirement Income Security Act of 1974 (‘‘ERISA’’)), and state law impose obligations on investment advisers. In some cases, these standards may differ from the standard enforced by the Commission. PO 00000 Frm 00353 Fmt 4701 Sfmt 4700 investment advisers and broker-dealers play an important role in our capital markets and our economy more broadly. Investment advisers and broker-dealers have different types of relationships with investors, offer different services, and have different compensation models. This variety is important because it presents investors with choices regarding the types of relationships they can have, the services they can receive, and how they can pay for those services. On April 18, 2018, the Commission proposed rules and forms intended to enhance the required standard of conduct for broker-dealers 4 and provide retail investors with clear and succinct information regarding the key aspects of their brokerage and advisory relationships.5 In connection with the publication of these proposals, the Commission published for comment a separate proposed interpretation regarding the standard of conduct for investment advisers under the Advisers Act (‘‘Proposed Interpretation’’).6 We stated in the Proposed Interpretation, and we continue to believe, that it is appropriate and beneficial to address in one release and reaffirm—and in some cases clarify—certain aspects of the fiduciary duty that an investment adviser owes to its clients under section 206 of the Advisers Act.7 After 4 Regulation Best Interest, Exchange Act Release No. 83062 (Apr. 18, 2018) (‘‘Reg. BI Proposal’’). 5 Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles, Investment Advisers Act Release No. 4888 (Apr. 18, 2018) (‘‘Relationship Summary Proposal’’). 6 Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation, Investment Advisers Act Release No. 4889 (Apr. 18, 2018). 7 Further, the Commission recognizes that many advisers provide impersonal investment advice. See, e.g., Advisers Act rule 203A–3 (defining ‘‘impersonal investment advice’’ in the context of defining ‘‘investment adviser representative’’ as ‘‘investment advisory services provided by means of written material or oral statements that do not purport to meet the objectives or needs of specific individuals or accounts’’). This Final Interpretation E:\FR\FM\12JYR2.SGM Continued 12JYR2 ER12JY19.045</GPH> [FR Doc. 2019–12376 Filed 7–11–19; 8:45 am] 33669

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 134 (Friday, July 12, 2019)]
[Rules and Regulations]
[Pages 33492-33669]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12376]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 240, 249, 275, and 279

[Release Nos. 34-86032; IA-5247; File No. S7-08-18]
RIN 3235-AL27


Form CRS Relationship Summary; Amendments to Form ADV

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'' or 
the ``SEC'') is adopting new rules and forms as well as amendments to 
its rules and forms, under both the Investment Advisers Act of 1940 
(``Advisers Act'') and the Securities Exchange Act of 1934 (``Exchange 
Act'') to require registered investment advisers and registered broker-
dealers (together, ``firms'') to provide a brief relationship summary 
to retail investors. The relationship summary is intended to inform 
retail investors about: The types of client and customer relationships 
and services the firm offers; the fees, costs, conflicts of interest, 
and required standard of conduct associated with those relationships 
and services; whether the firm and its financial professionals 
currently have reportable legal or disciplinary history; and how to 
obtain additional information about the firm. The relationship summary 
will also reference Investor.gov/CRS, a page on the Commission's 
investor education website, Investor.gov, which offers educational 
information to investors about investment advisers, broker-dealers, and 
individual financial professionals and other materials. Retail 
investors will receive a relationship summary at the beginning of a 
relationship with a firm, communications of updated information 
following a material change to the relationship summary, and an updated 
relationship summary upon certain events. The relationship summary is 
subject to Commission filing and recordkeeping requirements.

DATES: 
    Effective dates: The rules and form are effective September 10, 
2019.
    Compliance dates: The applicable compliance dates are discussed in 
section II.D.

FOR FURTHER INFORMATION CONTACT: : Gena Lai, James McGinnis, Elizabeth 
Miller, Sirimal R. Mukerjee, Olawal[eacute] Oriola, Alexis Palascak, 
Benjamin Tecmire, Roberta Ufford, Jennifer Porter (Branch Chief), 
Investment Adviser Regulation Office at (202) 551-6787 or 
sec.gov">[email protected]sec.gov; Benjamin Kalish and Parisa Haghshenas (Branch Chief), 
Chief Counsel's Office at (202) 551-6825 or sec.gov">[email protected]sec.gov, Division of 
Investment Management; Alicia Goldin, Emily Westerberg Russell, Lourdes 
Gonzalez (Assistant Chief Counsel), Office of Chief Counsel, Division 
of Trading and Markets, at (202) 551-5550 or sec.gov">[email protected]sec.gov, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting new rule 17 CFR 
275.204-5 [rule 204-5] under the Investment Advisers Act of 1940 [15 
U.S.C. 80b] \1\ and is adopting amendments to Form ADV to add a new 
Part 3: Form CRS [17 CFR 279.1] under the Advisers Act. The Commission 
is also adopting amendments to rules 17 CFR 275.203-1 [rule 203-1], 17 
CFR 275.204-1 [rule 204-1], and 17 CFR 275.204-2 [rule 204-2] under the 
Advisers Act. The Commission is adopting new rule 17 CFR 240.17a-14 
[rule 17a-14] \2\ under the Securities

[[Page 33493]]

Exchange Act of 1934 and new Form CRS [17 CFR 249.641] under the 
Exchange Act. The Commission is also adopting amendments to rules 17 
CFR 240.17a-3 [rule 17a-3] and 17 CFR 240.17a-4 [rule 17a-4] under the 
Exchange Act. The Commission is also adopting amendments to rule 17 CFR 
200.800 [rule 800].
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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.
---------------------------------------------------------------------------

Table of Contents

I. Introduction
II. Form CRS Relationship Summary
    A. Presentation and Format
    1. Limited Prescribed Wording
    2. Standard Question-and-Answer Format and Other Presentation 
Instructions
    3. Electronic and Graphical Formats, and Layered Disclosure
    4. Conversation Starters
    5. Presentation of Relationship Summaries by Dual Registrants 
and Affiliated Firms
    B. Items
    1. Introduction
    2. Relationships and Services
    3. Summary of Fees, Costs, Conflicts, and Standard of Conduct
    4. Disciplinary History
    5. Additional Information
    6. Proposed Items Omitted in Final Instructions
    C. Filing, Delivery, and Updating Requirements
    1. Definition of Retail Investor
    2. Filing Requirements
    3. Delivery Requirements
    4. Updating Requirements
    D. Transition Provisions
    E. Recordkeeping Amendments
III. Disclosures About a Firm's Regulatory Status and a Financial 
Professional's Association
IV. Economic Analysis
    A. Introduction
    B. Baseline
    1. Providers of Financial Services
    2. Investor Perceptions about the Marketplace for Financial 
Services and Disclosures
    3. Investor Responses to Disclosures About Financial 
Professionals and Firms
    C. Broad Economic Considerations
    D. Economic Effects of the Relationship Summary
    1. Retail Investors
    2. Broker-Dealers and Investment Advisers (Registrants)
    3. Impact on Efficiency, Competition, and Capital Formation
    4. Alternatives to the Relationship Summary
V. Paperwork Reduction Act Analysis
    A. Form ADV
    1. Respondents: Investment Advisers and Exempt Reporting 
Advisers
    2. Changes in Average 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 Exchange Act Rule 17a-3
    F. Record Retention Obligations Under Exchange Act Rule 17a-4
    1. Changes in Burden Estimates and New Burden Estimates
    2. Revised Annual Burden Estimates
VI. Final Regulatory Flexibility Analysis
    A. Need for and Objectives of the Amendments
    B. Significant Issues Raised by Public Comments
    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 and Filing of the Relationship Summary
    2. Delivery and Updating Requirements Related to the 
Relationship Summary
    3. Recordkeeping Requirements Related to the Relationship 
Summary
    E. Agency Action To Minimize Effect on Small Entities
VII. Statutory Authority
Text of the Rule and Form

I. Introduction

    Individual investors rely on the services of broker-dealers and 
investment advisers when making and implementing investment decisions. 
Research continues to show that retail investors are confused about the 
services, fees, conflicts of interest, and the required standard of 
conduct for particular firms, and the differences between broker-
dealers and investment advisers.\3\ We are adopting a new set of 
disclosure requirements designed to reduce retail investor confusion in 
the marketplace for brokerage and investment advisory services and to 
assist retail investors with the process of deciding whether to engage, 
or to continue to engage, a particular firm \4\ or financial 
professional and whether to establish, or to continue to maintain, an 
investment advisory or brokerage relationship.\5\ Firms will deliver to 
retail investors a customer or client relationship summary 
(``relationship summary'' or ``Form CRS'') that provides succinct 
information about the relationships and services the firm offers to 
retail investors, fees and costs that retail investors will pay, 
specified conflicts of interest and standards of conduct, and 
disciplinary history, among other things.\6\ The relationship summary 
will also link to Investor.gov/CRS on the Commission's investor 
education website, Investor.gov, which offers educational information 
to investors about investment advisers, broker-dealers, and individual 
financial professionals and other materials.
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    \3\ Brian Scholl, et al., SEC Office of the Investor Advocate 
and RAND Corporation, The Retail Market for Investment Advice 
(2018), available at https://www.sec.gov/comments/s7-07-18/s70718-4513005-176009.pdf (``OIAD/RAND'') (finding that participant 
understanding of types of financial services and financial 
professionals continues to be low). The SEC's Office of Investor 
Advocate and the RAND Corporation prepared this research report 
regarding the retail market of investment advice prior to, and 
separate from, our rulemaking proposal. This report was included in 
the comment file at https://www.sec.gov/comments/s7-07-18/s70718-4513005-176009.pdf.
    \4\ For purposes of this release, the term ``firm'' includes 
sole proprietorships and other business organizations that are 
registered as (i) an investment adviser under section 203 of the 
Advisers Act; (ii) a broker-dealer under section 15 of the Exchange 
Act; or (iii) a broker-dealer under section 15 of the Exchange Act 
and as an investment adviser under section 203 of the Advisers Act.
    \5\ The requirements adopted here, with modifications as 
discussed in this release, were proposed in Form CRS Relationship 
Summary; Amendments to Form ADV; Required Disclosures in Retail 
Communications and Restrictions on the use of Certain Names or 
Titles, Investment Advisers Act Release No. 4888, Exchange Act 
Release No. 83063 (Apr. 18, 2018) [83 FR 23848 (May 23, 2018)] 
(``Proposing Release'').
    \6\ For investment advisers registered with the Commission, a 
new Form ADV Part 3 will describe the requirements for the 
relationship summary and it will be required by amended rule 203-1. 
For broker-dealers, Form CRS will be required by 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 registered with the Commission. We are also adopting 
conforming technical and clarifying amendments to the General 
Instructions of Form ADV.
---------------------------------------------------------------------------

    We proposed a version of a relationship summary on April 18, 
2018.\7\ The proposed relationship summary would have required 
information separated into the following sections: (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); \8\ (vi) conflicts of

[[Page 33494]]

interest; (vii) where to find additional information, including whether 
the firm and its financial professionals currently have reportable 
legal or disciplinary history and who to contact about complaints; and 
(viii) key questions for retail investors to ask the firm's financial 
professional. The proposed instructions required firms to use 
standardized headings in a prescribed order throughout the disclosure 
and respond to the required items by using a mix of language prescribed 
in the instructions as well as their own wording in describing their 
services and offerings. The proposal limited the relationship summary 
to four pages or an equivalent length if in electronic format and also 
included three examples of how the relationship summary might look for 
a standalone broker-dealer, a standalone investment adviser, and a dual 
registrant.
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    \7\ See Proposing Release, supra footnote 5.
    \8\ We proposed definitions for ``standalone investment 
adviser'' and ``standalone broker-dealer''. See Proposed General 
Instruction 9.(f) to Form CRS. Given the streamlining and other 
revisions to the Form CRS instructions relative to the proposal, we 
believe that these proposed definitions are no longer needed and 
therefore are not adopting them. We use the terms throughout this 
release, however, for the avoidance of doubt, to indicate broker-
dealers and investment advisers that are not dual registrants. We 
are adopting the proposed definition for ``dual registrant'' 
substantially as proposed. We are adding language in the definition 
of dual registrant in the final instructions to clarify that a 
dually registered firm is not considered a dual registrant for 
purposes of Form CRS and the final instructions if the dually 
registered firm does not provide both investment advisory and 
brokerage services to retail investors. See General Instruction 11.C 
to Form CRS; see infra footnotes 201-202 and accompanying text.
---------------------------------------------------------------------------

    To better understand retail investors' views about the disclosures 
designed for them, the Commission engaged in broad outreach to 
investors and other market participants. As described further 
throughout the release, the Commission received substantial feedback on 
the proposed relationship summary in several forms. We received comment 
letters in connection with the Proposing Release from a variety of 
commenters including individual investors, consumer advocacy groups, 
financial services firms, investment professionals, industry and trade 
associations, state securities regulators, bar associations, and 
others.\9\ Several of those commenters provided alternative mock-ups to 
illustrate their suggestions. Additionally, some commenters submitted 
reports of surveys or studies that they had conducted or engaged third 
parties to conduct in connection with the proposal. The Commission also 
received input and recommendations from its Investor Advisory Committee 
(``IAC'') on the proposed relationship summary to improve its 
effectiveness.\10\
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    \9\ The comment letters are available in the comment file at 
https://www.sec.gov/comments/s7-08-18/s70818.htm.
    \10\ See Investor Advisory Committee, Recommendation of the 
Investor as Purchaser Subcommittee Regarding Proposed Regulation 
Best Interest, Form CRS, and Investment Advisers Act Fiduciary 
Guidance (Nov. 7, 2018), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac110718-investor-as-purchaser-subcommittee-recommendation.pdf. (``IAC Form CRS Recommendation''). 
The majority of the IAC recommended that the Commission conduct 
usability testing of the proposed Form CRS disclosures and, if 
necessary, revise them to ensure that they enable investors to make 
an informed choice among different types of providers and accounts. 
In addition, when considering potential Commission rulemaking under 
section 913 of the Dodd-Frank Act, the IAC also recommended that the 
Commission adopt a uniform, plain English disclosure document to be 
provided to customers and potential customers of broker-dealers and 
investment advisers at the start of the engagement, and periodically 
thereafter, that covers basic information about the nature of 
services offered, fees and compensation, conflicts of interest, and 
disciplinary record. See Investor Advisory Committee, Recommendation 
of the Investor Advisory Committee: Broker-Dealer Fiduciary Duty 
(Nov. 22, 2013), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/fiduciary-duty-recommendation-2013.pdf, as amended in https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac112213-minutes.htm (``IAC Broker-Dealer 
Fiduciary Duty Recommendations''). We discuss these IAC findings and 
recommendations in several sections below. Under section 39 of the 
Exchange Act, the Commission is required to review, assess, and 
disclose the action, if any, the Commission intends to take with 
respect to the findings and recommendations of the IAC; however, the 
Commission is not required to agree or to act upon any such findings 
or recommendations. See 15 U.S.C. 78pp.
---------------------------------------------------------------------------

    The Commission also solicited comments from individual investors 
through a number of forums in addition to the traditional requests for 
comment in the Proposing Release. The Commission used a ``feedback 
form'' designed specifically to solicit input from retail investors 
with a set of questions requesting both structured and narrative 
responses, and received more than 90 responses from individuals who 
reviewed and commented on the sample proposed relationship summaries 
published in the proposal.\11\ Seven investor roundtables were held in 
different locations across the country to solicit further comment from 
individual investors on the proposed relationship summary, and we 
received in-person feedback from almost 200 attendees in total.\12\
---------------------------------------------------------------------------

    \11\ The feedback forms are available in the comment file at 
https://www.sec.gov/comments/s7-08-18/s70818.htm (``Feedback 
Forms''). When we refer to Feedback Form commenters, we include 
those who completed and submitted a Feedback Form with a relevant 
response or comment answering at least one of the questions on the 
form. To simplify discussion of comments received on the Feedback 
Forms, staff aggregated and summarized these comments in an appendix 
to this release (see Appendix C, the ``Feedback Forms Comment 
Summary''), and references to individual Feedback Forms in this 
release use short-form names defined in the Feedback Forms Comment 
Summary.
    \12\ The transcripts from the seven investor roundtables, which 
took place in Atlanta (``Atlanta Roundtable''), Baltimore 
(``Baltimore Roundtable''), Denver (``Denver Roundtable''), Houston 
(``Houston Roundtable''), Miami (``Miami Roundtable''), Philadelphia 
(``Philadelphia Roundtable''), and Washington, DC (``Washington, DC 
Roundtable''), are available in the comment file at https://www.sec.gov/comments/s7-08-18/s70818.htm#transcripts.
---------------------------------------------------------------------------

    Further, the Commission's Office of the Investor Advocate engaged 
the RAND Corporation (``RAND'') to conduct investor testing of the 
proposed relationship summary.\13\ RAND conducted a survey of over 
1,400 individuals through a nationally representative panel to collect 
information on the opinions, preferences, attitudes, and level of self-
assessed comprehension regarding the sample dual-registrant 
relationship summary in the proposal. RAND also conducted qualitative 
interviews of a smaller sample of individuals to ascertain 
comprehension of the relationship summary and gain feedback from 
interview participants, which allowed RAND to obtain insights to 
complement its survey.\14\ On November 7, 2018, the Office of the 
Investor Advocate made the report on that testing available in the 
comment file to allow the public to consider and comment on the 
supplemental information.\15\ The Commission received several letters 
in response to the inclusion of the RAND 2018 report in the comment 
file.\16\
---------------------------------------------------------------------------

    \13\ Angela A. Hung, et al., RAND Corporation, Investor Testing 
of Form CRS Relationship Summary (2018), available at https://www.sec.gov/about/offices/investorad/investor-testing-form-crs-relationship-summary.pdf (``RAND 2018'').
    \14\ RAND conducted a total of 31 in-person interviews with 
investors recruited using guidelines designed to achieve a sample 
that had a broad range of educational background, racial and ethnic 
characteristics, gender, age and experience working with financial 
professionals. In describing the design of qualitative interviews, 
RAND explains that interviews included some general questions about 
comprehension and helpfulness of the form, which provided a window 
into participants' understanding of concepts introduced in the 
relationship summary, but were not designed to serve as a full 
assessment of participants' objective understanding of the 
relationship summary. See RAND 2018, supra footnote 13.
    \15\ See Investor Testing of the Proposed Relationship Summary 
for Investment Advisers and Broker-Dealers, Securities and Exchange 
Commission Press Release 2018-257 (Nov. 7, 2018), available at 
https://www.sec.gov/news/press-release/2018-257.
    \16\ See, e.g., Comment Letter of Investment Adviser Association 
(Dec. 4, 2018); Comment Letter of Ron A. Rhodes (Dec. 6, 2018); 
Comment Letter of AFL-CIO, et al. (Dec. 7, 2018) (``AFL-CIO 
Letter''); Comment Letter of Betterment (Dec. 7, 2018) (``Betterment 
Letter II''); Comment Letter of Consumer Federation of America (Dec. 
7, 2018) (``CFA Letter II''); Comment Letter of Financial Services 
Institute (Dec. 7, 2018) (``FSI Letter II''); Comment Letter of 
Public Investors Arbitration Bar Association (Dec. 7, 2018); Comment 
Letter of Consumer Reports (Feb. 15, 2019) (``Consumer Reports 
Letter'').
---------------------------------------------------------------------------

    As noted, some commenters submitted reports of surveys and studies 
to the comment file, and the design and scope of these varied 
considerably. Two reports described online surveys of

[[Page 33495]]

larger sample sizes--one based on the sample proposed dual-registrant 
relationship summary \17\ and another based on the proposed sample 
standalone investment adviser relationship summary.\18\ A group of 
commenters submitted two reports of usability testing of the sample 
proposed dual-registrant relationship summary based on a small number 
of long-form interviews.\19\ One of the two surveys, and the two 
interview-based studies, included questions designed to ascertain 
comprehension and tested alternate relationship summary designs with 
changes to some of the proposed prescribed wording and presentation 
from the proposal.\20\ Finally, two different commenters submitted 
surveys of retail investors' views about disclosure communications 
provided by firms and their relationships with financial professionals, 
which did not test any version of the proposed relationship 
summary.\21\
---------------------------------------------------------------------------

    \17\ Comment Letter of Cetera Financial Group (Nov. 19, 2018) 
(``Cetera Letter II'') (attaching report of Woelfel Research Inc. 
(``Woelfel'')). Woelfel, an independent research firm, conducted 
internet interviews in June 2018 with a sample of 800 adults aged 25 
and over, including individuals that had a current relationship with 
a financial professional and individuals who did not have a current 
financial professional relationship. Respondents were asked to read 
the sample dual-registrant relationship summary included in the 
proposal and answer a series of questions about the document overall 
and for specific sections. Id.
    \18\ Comment Letter of Betterment (Aug. 7, 2018) (``Betterment 
Letter I'') (attaching report of Hotspex, Inc. (``Hotspex'')). 
Hotspex, an independent research firm, conducted online surveys with 
304 current or potential U.S. investors ages 18 and over in June 
2018. The survey tested the standalone investment adviser 
relationship summary prepared following the instructions and sample 
design of the proposal (the ``SEC Form'') and a redesigned version 
developed by Betterment. Id. Respondents reviewed and answered 
questions about only one version; 154 responded to questions on the 
SEC Form. Id.
    \19\ Kleimann Communication Group, Inc., Final Report on Testing 
of Proposed Customer Relationship Summary Disclosures, Submitted to 
AARP, Consumer Federation of America, and Financial Planning 
Coalition (Sept. 10, 2018), available at https://www.sec.gov/comments/s7-08-18/s70818-4341455-173259.pdf (``Kleimann I'') 
(results of 15 90-minute qualitative interviews focusing on how 
consumers interacted with the sample dual-registrant relationship 
summary as proposed); Kleimann Communication Group, Inc., Report on 
Development and Testing of Model Client Relationship Summary, 
Presented to AARP and Certified Financial Planner Board of 
Standards, Inc. (Dec. 5, 2018), available at https://www.sec.gov/comments/s7-07-18/s70718-4729850-176771.pdf (``Kleimann II'') 
(results of testing alternate designs of the proposed dual-
registrant relationship summary in 18 one-on-one qualitative 
interviews).
    \20\ See Betterment Letter I (Hotspex), supra footnote 18 
(online survey included ten true-false questions designed to test 
investor comprehension of the standalone investment adviser 
relationship summary as proposed relative to a version redesigned by 
Betterment); Kleimann I, supra footnote 19 (interview questions 
designed to elicit responses that could demonstrate two levels of 
cognitive skills); Kleimann II, supra footnote 19.
    \21\ Comment Letter of Charles Schwab & Co., Inc. (Aug. 6, 2018) 
(``Schwab Letter I'') (attaching report of Koski Research 
(``Koski'')). Koski, an independent research firm, conducted an 
online survey of a national sample of 1000 investors in June 2018 to 
measure investor understanding of fiduciary duty and best interest 
standards for investment advice and obtain input from retail 
investors on method, frequency and content of disclosure 
communications. Id.; Comment Letter of the Center for Capital 
Markets Competitiveness of the U.S. Chamber of Commerce (Sept. 5, 
2018) (``CCMC Letter'') (attaching report of investor polling 
(``investor polling'')). CCMC commissioned online polling of 801 
investors in May 2018 to examine investors' perspectives on working 
with financial professionals and gauge priorities regarding new 
regulatory requirements. Id.
---------------------------------------------------------------------------

    The Commission appreciates the time and effort of these commenters 
who submitted surveys and studies. The Commission has carefully 
considered this input. The varying designs and scope of these surveys 
and studies limits us from drawing definitive conclusions, and we do 
not view any one of the surveys and studies submitted by commenters, or 
the RAND 2018 report, as dispositive. However, these surveys and 
studies submitted by commenters, together with the results of the RAND 
2018 report, input from individual investors at our roundtables and on 
Feedback Forms, and other information offered by other commenters, have 
informed our policy choices. Throughout this release we discuss 
observations reported in the RAND 2018 report and in surveys and 
studies submitted by commenters, and how these observations informed 
our policy choices as well as the costs and benefits of such choices.
    Overall, we believe that feedback we have received from or on 
behalf of retail investors through the RAND 2018 report, surveys and 
studies submitted by commenters, and input received at roundtables and 
on Feedback Forms, demonstrate that the proposed relationship summary 
would be useful for retail investors and provide information, e.g., 
about services, fees and costs, and standard of care, that would help 
investors to make more informed choices when deciding among firms and 
account options. For example, among the RAND 2018 survey respondents, 
nearly 90% said that the relationship summary would help them make more 
informed decisions about types of accounts and services and more than 
80% said it would help them compare accounts offered by different 
firms.\22\ RAND 2018 survey participants rated information about the 
firm's relationship and services and fees and costs to be among the 
most informative.\23\ In other surveys, large majorities of respondents 
also reacted positively to the relationship summary and the types of 
information that would be provided.\24\ In the RAND 2018 qualitative 
interviews, it was observed that participants could learn new 
information from the proposed relationship summary.\25\ Similarly, 
other surveys and studies that assessed investor comprehension observed 
that investors learned important information by reviewing the 
relationship summary.\26\ Over 70% of individuals submitting Feedback 
Forms commented that they found the relationship summary to be 
``useful,'' with more than 80% rating the relationship summary sections 
describing relationships and services, obligations, and fees and costs 
as ``very useful'' or ``useful.'' \27\ Investor roundtable participants 
also reacted

[[Page 33496]]

positively and indicated that they found the relationship summary to be 
useful.\28\ A significant percentage of RAND 2018 survey participants 
agreed that the relationship summary would facilitate conversations 
between retail investors and their financial professionals, and other 
surveys and studies reported similar observations.\29\ Investor 
roundtable participants and comments on Feedback Forms also indicated 
that the relationship summary could facilitate conversations between 
retail investors and their financial professionals in a beneficial 
way.\30\
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    \22\ RAND 2018, supra footnote 13.
    \23\ RAND 2018, supra footnote 13 (a majority of respondents 
rated both of the relationships and services section and fees and 
costs sections of the relationship summary as one of two sections 
that are ``most informative'').
    \24\ Cetera Letter II (Woelfel), supra footnote 17 (more than 
80% of respondents rated all of the nine topics covered by the 
relationship summary as ``very'' or ``somewhat'' important; 88% 
rated fees and costs and the firm's obligations as ``very'' or 
``somewhat'' important; 61% said the relationship summary had 
provided the necessary information to help decide whether a 
brokerage relationship or an advisory relationship is best); 
Betterment Letter I (Hotspex), supra footnote 18 (finding that 
around 90% of survey respondents found the proposed relationship 
summary ``very useful'' or ``somewhat useful''); see also CCMC 
Letter (investor polling), supra footnote 21 (when the concept of 
the proposed relationship summary was described, 62% of participants 
said they would be interested in reading the document and 72% agreed 
that the new document will ``boost transparency and help build 
stronger relationships between me and my financial professional'').
    \25\ RAND 2018, supra footnote 13 (concluding from qualitative 
interviews that ``[p]articipants demonstrated evidence of learning 
new information from the relationship summary'' even though 
interview discussions revealed areas of confusion).
    \26\ See Kleimann I, supra footnote 19 (although the authors 
concluded that, overall, participants had difficulty with ``sorting 
out similarities and differences,'' the study reports that ``nearly 
all participants easily identified a key difference between 
Brokerage Accounts and Advisory accounts as the fee structure'' and 
that ``most participants understood that both Brokerage Accounts and 
Advisory Accounts could have financial relationships with other 
companies that could be potential conflicts with clients' best 
interests.''); see also Betterment Letter I (Hotspex), supra 
footnote 18 (83% of respondents correctly identified as ``true'' a 
statement that ``some investment firms have a conflict of interest 
because they benefit financially from recommending certain 
investments'' when viewing a version of the standalone adviser 
relationship summary constructed based on the instructions set forth 
in the proposal'').
    \27\ See Feedback Forms Comment Summary, supra footnote 11 
(summary of answers to Questions 1 and 2). In addition, more than 
70% of commenters on Feedback Forms rated all of the other sections 
of the proposed relationship summary as ``very useful'' or 
``useful.'' Id.
    \28\ See e.g., Houston Roundtable, at 19 (``I think your idea of 
having . . . a short four page . . . is really helpful''), at 27 
(reacting positively to the idea of the relationship summary but 
asking that updated versions indicate the changed content), and at 
35 (agreeing that a disclosure such as the relationship summary is 
needed); Atlanta Roundtable, at 28 (stating that the proposed sample 
relationship summary is ``a very good form'' and ``concise'' and 
``easy to read and clear'' but needs to be in a form that can be 
compared with other relationship summaries).
    \29\ RAND 2018, supra footnote 13 (approximately 76% of 
participants agreed that they would use the relationship summary as 
the basis for a conversation with an investment professional; in 
qualitative interviews, participants said they liked all of the 
questions and they would ask questions in meeting with a financial 
service provider); see also Kleimann I, supra footnote 19 (many 
investors responded that they would use key questions when speaking 
with their brokers); Betterment Letter I (Hotspex), supra footnote 
18 (93% of respondents viewing a version of the proposed standalone 
relationship summary indicated that they were very or somewhat 
likely to ask the suggested questions.).
    \30\ Houston Roundtable (several investors responding that key 
questions would be helpful conversation starters, one commenter 
remarking that the Key Questions were ``very, very good''); Feedback 
Forms Comment Summary, supra footnote 11 (summary of responses to 
Question 7) (over 75% of commenters indicated that the Key Questions 
are useful). Eleven Feedback Forms included specific comments 
agreeing that the Key Questions would encourage discussions with 
financial professionals. See, e.g., Hawkins Feedback Form (``Useful 
information for the investor to have before engaging in a 
conversation with an investment firm. Giving some examples of types 
of questions to ask would be beneficial.''); Asen Feedback Form 
(``The Relationship Summary (and not the individual BD or RIA 
account opening forms) is the opportunity to have that important 
conversation and ``educate'' the customer.''); Baker Feedback Form 
(``key questions are very useful as they give words to an 
unsophisticated client'').
---------------------------------------------------------------------------

    Many other commenters supported the concept of a short disclosure 
document for retail investors that would serve as part of a layered 
disclosure regime,\31\ and agreed that that the relationship summary 
would facilitate conversations between retail investors and their 
financial professionals in a beneficial way.\32\ However, some 
commenters argued that the relationship summary is duplicative of other 
disclosures and is unnecessary.\33\ Others cautioned against over-
reliance on disclosure efforts to address all issues related to the 
different business models and the applicable standard of conduct for 
broker-dealers and investment advisers.\34\
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    \31\ See, e.g., Comment Letter of AARP (Aug. 7, 2018) (``AARP 
Letter''); Comment Letter of Consumers Union (Oct. 19, 2018) 
(``Consumers Union Letter''); Comment Letter Type B; Comment Letter 
of the North American Securities Administrators Association, Inc. 
(Aug. 23, 2018) (``NASAA Letter''); Comment Letter of the Securities 
Industry and Financial Markets Association (Aug. 7, 2018) (``SIFMA 
Letter''); Comment Letter of Triad Advisors, LLC (Jul. 26, 2018) 
(``Triad Letter''); Comment Letter of Investacorp, Inc. (Jul. 26, 
2018) (``Investacorp Letter''); Comment Letter of Ladenburg Thalmann 
Financial Services Inc. (Jul. 26, 2018) (``Ladenburg Letter''); 
Comment Letter of KMS Financial Services, Inc. (Jul. 27, 2018) 
(``KMS Financial Letter''); Comment Letter of Securities America, 
Inc. (Jul. 27, 2018) (``Securities America Letter'').
    \32\ See, e.g., Comment Letter of Commonwealth Financial Network 
(Aug 7, 2018) (``CFN Letter'') (``Form CRS may also drive 
conversations that help potential clients and advisors determine 
which type of relationship (brokerage or advisory) is most 
appropriate.''); CCMC Letter (concluding from investor polling that 
``[t]he SEC's proposed Form CRS could be a good way to start a 
conversation with investors.''); Comment Letter of the Financial 
Services Institute (Aug. 7, 2018) (``FSI Letter I'') (``The greatest 
benefit of these disclosures will come in the conversations they 
facilitate between the client and their financial professionals''); 
Comment Letter Wells Fargo & Company (Aug. 7, 2018) (``Wells Fargo 
Letter'') (``the basic premise that a brief overview document 
designed to provide a high-level understanding of important 
information to clients (with directions to more detailed 
information) that can be used to prompt more detailed conversations 
with financial professionals is a good one''). Triad Letter (``The 
greatest benefit of the CRS will come in the conversations it 
facilitates between the client and their Financial Professional. . . 
.''); Ladenburg Letter (same); KMS Financial Letter (same).
    \33\ Some commenters stated that Form CRS would be duplicative 
of the Disclosure Obligation required by Regulation Best Interest. 
See, e.g., Triad Letter; Investacorp Letter; Ladenburg Letter; KMS 
Financial Letter; Securities America Letter; FSI Letter I; Comment 
Letter of Securities Service Network, LLC (Aug. 6, 2018); Comment 
Letter of Cambridge Investment Research, Inc. (Aug. 7, 2018) 
(``Cambridge Letter''). Others argued that Form CRS is duplicative 
of other Form ADV disclosures. See, e.g., Comment Letter of 
MarketCounsel (Aug. 7, 2018) (``MarketCounsel Letter''); Comment 
Letter of the Investment Adviser Association (Aug. 6, 2018) (``IAA 
Letter I''); Comment Letter of Gerald Lopatin (Jul. 30, 2018). One 
commenter expressed concern that because the relationship summary 
would be duplicative of Form ADV and Form BD, retail customers would 
be less likely to read the more comprehensive disclosures. See 
Comment Letter of Financial Engines (Aug. 6, 2018) (``Financial 
Engines Letter'').
    \34\ See Comment Letter of Integrated Financial Planning 
Solutions (Jul. 20, 2018) (``IFPS Letter'') (``Clients do not have 
the ability to understand the disclosure material that is still 
written only by and for lawyers.''); Comment Letter of Sen. 
Elizabeth Warren (Aug. 7, 2018) (``Warren Letter'') (arguing that 
``the [Commission] shouldn't rely on disclosure alone to protect 
consumers''); Consumers Union Letter (``[W]hile we support simple, 
understandable disclosures, we caution against placing too much 
reliance on disclosure to protect investors.''); Consumer Reports 
Letter.
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    Nearly all commenters (including commenters on Feedback Forms) and 
investors participating in roundtables, suggested modifications to the 
proposed relationship summary, as did observations reported in the RAND 
2018 report and surveys and studies submitted to the comment file. 
Suggested changes generally pertained to: Appropriate placement of 
educational material; length and format; use of prescribed wording; 
comprehensibility; additional flexibility for firms; and delivery 
requirements (including electronic delivery). For example, some 
commenters and observations from the RAND 2018 survey and other surveys 
and studies indicated that the proposed relationship summary could be 
difficult to understand, particularly the proposed disclosures on fees, 
conflicts of interest, and standards of conduct.\35\ Many commenters 
preferred a shorter, one-to-two page document relying more heavily on 
layered disclosure, such as by using more hyperlinks and other cross-
references to more detailed disclosure.\36\ Many commenters from both 
industry and investor groups argued that some of the prescribed wording 
would not be accurate or applicable in relation to the different 
services and business models of all firms or could lead to confusing or

[[Page 33497]]

misleading disclosures.\37\ Various commenters advocated for more 
flexibility for firms to use their own wording to describe their 
services more accurately.\38\ Many commenters favored the use of a 
question-and-answer format, suggesting, for example, that focusing a 
document on investors' questions helps them to feel that the document 
is relevant to them and encourages them to read it.\39\ Some commenters 
viewed parts of the relationship summary as educational, such as the 
sections comparing broker-dealers and investment advisers, describing 
the applicable standard of conduct, and containing key questions 
investors should ask, and advocated that the Commission should develop 
and provide educational material separately from firm-specific 
disclosures, such as in an additional disclosure layer or on the 
Commission's website.\40\ Several individuals submitting Feedback Forms 
also were supportive of links to additional educational 
information.\41\
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    \35\ See RAND 2018, supra footnote 13 (among other findings, the 
percentages of respondents indicating that the fees and costs, 
conflicts of interest, and standards of conduct sections were either 
``difficult'' or ``very difficult'' to understand were 35.5%, 33.5%, 
and 22.9%, respectively); Kleimann I, supra footnote 19 (noting that 
participants had difficulty ``sorting out similarities and 
differences between Broker-Dealer Services and Investment Adviser 
Services. Both the formatting and language contributed to the 
confusion.''); Betterment Letter I (Hotspex), supra footnote 18 
(showing that survey participants had difficulty understanding 
differences in standard of care and did not find the section on 
conflicts in the standalone adviser relationship summary to be 
useful); see also Comment Letter of John Wahh (Apr. 23, 2018) 
(``Wahh Letter'') (relationship summary is ``impenetrable''); 
Comment Letter of David John Marotta (Apr. 26, 2018) (``Marotta 
Letter'') (disclosures would be too confusing to clients); Comment 
Letter of John H. Robinson (Aug. 6, 2018) (``Robinson Letter'') 
(expressing concern that relationship summary is too text-heavy for 
consumers to read and will be ineffective in resolving investor 
confusion); Comment Letter of CFA Institute (Aug. 7, 2018) (``CFA 
Institute Letter I'') (``[A]s proposed, CRS is too wordy and 
technically written for the average investor to understand.'').
    \36\ See, e.g., AARP Letter; Comment Letter of Better Markets 
(Aug. 7, 2018) (``Better Markets Letter''); Comment Letter of the 
Bank of America (Aug. 7, 2018) (``Bank of America Letter''); Comment 
Letter of the Committee on Capital Markets Regulation (Jul. 16, 
2018) (``CCMR Letter''); Comment Letter of LPL Financial LLC (Aug. 
7, 2018) (``LPL Financial Letter''); Schwab Letter I. Cf. RAND 2018, 
supra footnote 13 (finding at least a plurality of respondents would 
keep the length of each section ``as is''; however, when asked ``Is 
the Relationship Summary too long, too short, or about right?'', 
56.9% of respondents answered ``too long'' and only 41.2% responded 
``about right'').
    \37\ See, e.g., Comment Letter of the Vanguard Group, Inc. (Aug. 
7, 2018) (``Vanguard Letter'') (explaining instances in which the 
prescribed wording would be inaccurate or not sufficiently nuanced 
for some of its services); Comment Letter of the American Council of 
Life Insurers (Aug. 3, 2018) (``ACLI Letter'') (``[M]any of the 
statements mandated in the Proposed Rule are inaccurate from the 
perspective of a life insurer-affiliated broker-dealer); IAA Letter 
I (expressing concern that the proposed prescribed language 
describing legal standards of conduct would result in less accurate 
understanding and greater confusion for investors); FSI Letter I 
(``[S]ome of the prescribed disclosure language is highly 
problematic, will add to investor confusion, and would negatively 
impact [firms'] client relationships.''); AARP Letter (expressing 
concern that some of the prescribed language is too technical and 
likely to confuse retail investors); Comment Letter of the Insured 
Retirement Institute (Aug. 7, 2018) (``IRI Letter'') (expressing 
concern that the prescribed language would not permit descriptions 
of services offered outside of brokerage accounts, such as 
recommendations of variable annuities). One commenter asserted that 
prescribed wording requiring firms to compare themselves adversely 
with their competitors could raise First Amendment concerns. See 
Comment Letter of the Consumer Federation of America (Aug. 7, 2018) 
(``CFA Letter I'') (arguing that certain language requiring firms to 
compare their own services unfavorably to those of their competitors 
may raise First Amendment concerns, and that Proposed Item 5, 
Comparisons to be provided by standalone investment advisers and 
standalone broker-dealers, should be eliminated entirely); see also 
infra footnotes 77-80 and accompanying text. Although not explicitly 
raising First Amendment concerns, another commenter also opposed 
requiring firms to describe services of other types of financial 
professionals. See IAA Letter I (``In our view, it is not 
appropriate to require firms to include statements about business 
models other than their own.''). But see Comment Letter of AFL-CIO, 
Consumer Federation of America, et. al. (Apr. 26, 2019) (``AFL-CIO, 
CFA Letter'') (arguing that allowing firms more flexibility in their 
disclosure will result in a failure to clearly convey important 
information, and such information would not be comparable from firm 
to firm).
    \38\ See, e.g., ACLI Letter (``Firms should have the flexibility 
in the Form CRS to accurately describe their business model and what 
their clients can expect from the relationship''); NASAA Letter 
(``[F]irms should have some level of flexibility in crafting their 
own Form CRS so that it is tailored for the different types of 
customers they service.''); Letter from Members of Congress (Aug. 8, 
2019) (``The SEC should develop a disclosure form that ensures firms 
have the flexibility to provide information that the average 
investor will understand.''); IAA Letter I (advocating that firms be 
given flexibility to draft their own descriptions of their principal 
services and conflicts of interest); FSI Letter I (suggesting that 
the prescribed wording regarding the extent and frequency of 
monitoring be removed or customized using the firm's own wording); 
IRI Letter (firms need more latitude to describe their relationships 
and services and fees and costs, given their variability; one-size-
fits-all disclosures are insufficient); Comment Letter of T. Rowe 
Price (Aug. 10, 2018) (``T. Rowe Letter'') (firms should have the 
flexibility to tailor their disclosures to make it clearer and more 
readable without potentially confusing investors); Vanguard Letter 
(suggesting that the Commission clarify that all of the prescribed 
disclosures may be modified to accurately describe the nature of 
firms' services and conflicts of interest given their business 
models); Comment Letter of CUNA Mutual Group (Aug. 7, 2018).
    \39\ See, e.g., CFA Letter I. Many of the mock-ups submitted by 
commenters used a question-and-answer format. See Comment Letter of 
Fidelity Brokerage Services LLC (Aug. 7, 2018) (``Fidelity 
Letter''); IAA Letter I; LPL Financial Letter; Comment Letter of 
Primerica (Aug. 7, 2018) (``Primerica Letter''); Schwab Letter I; 
SIFMA Letter; Wells Fargo Letter. For the purposes of this release, 
we view the substance and design of all mock-ups that commenters 
provided within their comment letters as comments on our proposed 
form, and the mock-ups have informed our approach to the 
relationship summary, as discussed below throughout.
    \40\ See, e.g., Comment Letter of the American Securities 
Association (Aug. 7, 2018) (``ASA Letter''); Primerica Letter; ACLI 
Letter; IAA Letter I; Comment Letter of Pickard Djinis and Pisarri 
LLP (Aug. 14, 2018) (``Pickard Djinis and Pisarri Letter''); Comment 
Letter of L.A. Schnase (Jul. 30, 2018) (``Schnase Letter''); CFA 
Letter I; LPL Financial Letter.
    \41\ See, e.g., Daunheimer Feedback Form (``I would like to see 
a list of applicable websites for discerning disciplinary websites 
or anything else that would additionally educate a consumer.''); 
Asen Feedback Form (``Might want to consider hyperlinking key words 
for ease of definition lookup.''); Baker Feedback Form (responding 
to a question on the Additional Information section, commented 
``Helpful also were the website links, i.e., sec.gov, investor.gov, 
BrokerCheck.Finra.org.''); Smith2 Feedback Form (``would like to see 
a link included a site or sites that contain general investment 
information. Types of investments, risks, time horizons . . .'').
---------------------------------------------------------------------------

    Although some commenters argued that the relationship summary is 
duplicative of other disclosures and is unnecessary,\42\ we believe 
that the relationship summary has a distinct purpose and will provide a 
separate and important benefit relative to other disclosures. The 
relationship summary is designed to help retail investors select or 
determine whether to remain with a firm or financial professional by 
providing better transparency and summarizing in one place selected 
information about a particular broker-dealer or investment adviser. The 
format of the relationship summary also allows for comparability among 
the two different types of firms in a way that is distinct from other 
required disclosures. Both broker-dealers and investment advisers must 
provide disclosures on the same topics under standardized headings in a 
prescribed order to retail investors, which should benefit retail 
investors by allowing them to more easily compare services by comparing 
different firms' relationship summaries.\43\ We do not believe that 
existing disclosures provide this level of transparency and 
comparability across investment advisers, broker-dealers, and dual 
registrants. The relationship summary also encourages retail investors 
to ask questions and highlights additional sources of information. All 
of these features should make it easier for investors to get the facts 
they need when deciding among investment firms or financial 
professionals and the accounts and services available to them. As noted 
above, the relationship summary will complement additional rules and 
guidance that the Commission is adopting concurrently to enhance 
protections for retail investors and is not designed to address all 
investor protection issues related to different business models and 
legal obligations of broker-dealers and investment advisers.\44\
---------------------------------------------------------------------------

    \42\ See supra footnote 33.
    \43\ Several individuals submitting Feedback Forms said that 
more firm-specific information that could be easily compared would 
be helpful. See, e.g., Lee1 Feedback Form (``The information should 
let me compare firms. . . . Make it short, more useful (so I can 
compare services and firms).''); Anonymous13 Feedback Form (``Firm 
specific info would be nice on this document.''); Bhupalam Feedback 
Form (``I would like to see additional information regarding 
specific firm rather than a general description.'').
    \44\ See supra footnote 34.
---------------------------------------------------------------------------

    Further to this purpose, in response to the comment letters and 
other feedback, we modified the instructions to reorganize and 
streamline the relationship summary, to enable more accurate 
descriptions tailored to what firms offer, and to help improve investor 
understanding of the disclosures provided. The instructions we are 
adopting are consistent with and designed to fulfill the original goals 
of the proposal, including the creation of relationship summaries that 
will highlight certain information in one place for retail investors in 
order to help them select or decide whether to remain with a firm or 
financial professional, encourage retail investors to engage in 
meaningful and individualized conversations with their financial 
professionals, and empower them to easily find additional information. 
Although certain prescribed generalized

[[Page 33498]]

comparisons between brokerage and investment advisory services have 
been removed from the final instructions, we believe the revised 
instructions will result in more meaningful comparisons among firms.
    The key changes of the relationship summary and instructions we are 
adopting include the following: \45\
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    \45\ If any of the provisions of these rules, or the application 
thereof to any person or circumstance, is held to be invalid, such 
invalidity shall not affect other provisions or application of such 
provisions to other persons or circumstances that can be given 
effect without the invalid provision or application.
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     Standardized Question-and-Answer Format and Less 
Prescribed Wording. Instead of declarative headings as proposed, the 
final instructions for the relationship summary will require a 
question-and-answer format, with standardized questions serving as the 
headings in a prescribed order to promote consistency and comparability 
among different relationship summaries. The headings will be structured 
and machine-readable, to facilitate data aggregation and comparison. 
Under the standardized headings, firms will generally use their own 
wording to address the required topics. Thus, the final instructions 
contain less prescribed language, which creates more flexibility in 
providing accurate information to investors. Investment advisers and 
broker-dealers will be limited to two pages and dual registrants will 
be limited to four pages (or an equivalent length if in electronic 
format).\46\
---------------------------------------------------------------------------

    \46\ For clarification purposes, one page is equivalent to a 
single-side of text on a sheet of paper, rather than two sides of 
the same paper.
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     Use of Graphics, Hyperlinks, and Electronic Formats. To 
help retail investors easily digest the information, the instructions 
will specifically encourage the use of charts, graphs, tables, and 
other graphics or text features in order to explain or compare 
different aspects of the firm's offerings. If the chart, graph, table, 
or other graphical feature is self-explanatory and responsive to the 
disclosure item, additional narrative language that may be duplicative 
is not required. For electronic relationship summaries, the 
instructions encourage online tools that populate information in 
comparison boxes based on investor selections. The instructions permit, 
and in some instances require, a firm to cross-reference additional 
information (e.g., concerning services, fees, and conflicts), and will 
require embedded hyperlinks in electronic versions to further 
facilitate layered disclosures. Firms must use text features to make 
the required cross-references more noticeable and prominent in relation 
to other discussion text.
     Introduction With Link to Commission Information. The 
relationship summary will include a more streamlined introductory 
paragraph that will provide a link to Investor.gov/CRS, a page on the 
Commission's investor education website, Investor.gov, which offers 
educational information about investment advisers, broker-dealers, and 
individual financial professionals and other materials. In order to 
highlight the importance of these materials, the introduction also will 
note that brokerage and advisory services and fees differ and that it 
is important for the retail investor to understand the differences.
     Combined Fees, Costs, Conflicts of Interest, and Standard 
of Conduct Section. We are integrating the proposed fees and costs 
section with the sections discussing the conflicts of interest and 
standards of conduct. We are also expanding the discussion of fees and 
making several other changes to help make the disclosures clearer for 
retail investors. The relationship summary will cover the same broad 
topics as proposed, including a summary of fees and costs, a 
description of ways the firm makes money, certain conflicts of 
interest, and standards of conduct. In addition, firms will include 
disclosure about financial professionals' compensation.
     Separate Disciplinary History Section. Firms will be 
required to indicate under a separate heading whether or not they or 
any of their financial professionals have reportable disciplinary 
history and where investors can conduct further research on these 
events, instead of including this information under the Additional 
Information section as proposed.
     Conversation Starters. The proposed Key Questions to Ask 
have generally been integrated into the relationship summary sections 
either as question-and-answer headings or as additional ``conversation 
starters'' to provide clearer context for the questions. Retail 
investors can use these questions to engage in dialogue with their 
financial professionals about their individual circumstances. The 
discussion topics raised by certain other proposed key questions have 
been incorporated into the relationship summary through otherwise-
required disclosure.
     Elimination of Proposed Comparisons Section. We are 
eliminating the proposed requirement that broker-dealers and investment 
advisers include a separate section using prescribed wording that in a 
generalized way described how the services of investment advisers and 
broker-dealers, respectively, differ from the firm's services. We 
encourage, but do not require, dual registrants to prepare a single 
relationship summary that discusses both brokerage and investment 
advisory services. Whether dual registrants prepare a single or two 
separate relationship summaries to describe their brokerage and 
investment advisory services, they must present information on both 
services with equal prominence and in a manner that clearly 
distinguishes and facilitates comparison between the two. The material 
provided on Investor.gov offers educational information about 
investment advisers, broker-dealers, and individual financial 
professionals and other materials.
     Delivery. As proposed, investment advisers must deliver a 
relationship summary to each new or prospective client who is a retail 
investor before or at the time of entering into an investment advisory 
contract with the retail investor. In a change from the proposal, 
broker-dealers must deliver the relationship summary to each new or 
prospective customer who is a retail investor before or at the earliest 
of: (i) A recommendation of an account type, a securities transaction, 
or an investment strategy involving securities; (ii) placing an order 
for the retail investor; or (iii) the opening of a brokerage account 
for the retail investor. We also are revising the instructions to 
provide greater clarity on the use of electronic delivery, while 
generally maintaining the guidelines that were proposed.
    We designed the final disclosure requirements in light of comments, 
input from individual investors through roundtables and on Feedback 
Forms, and observations reported in the RAND 2018 report and other 
surveys and studies, that suggest retail investors benefit from 
receiving certain information about a firm before the beginning of a 
relationship with that firm, but they prefer condensed disclosure so 
that they may focus on information that they perceive as salient to 
their needs and circumstances, and prefer having access to other 
``layers'' of additional information rather than receiving a 
significant amount of information at once. Together, all of the 
required disclosures will assist a retail investor to make an informed 
choice regarding whether a brokerage or investment advisory 
relationship, as well as whether a particular broker-dealer or 
investment adviser, best suits his or her particular needs and

[[Page 33499]]

circumstances. The relationship summary will complement additional 
rules and guidance that the Commission is adopting concurrently to 
enhance protections for retail investors.\47\
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    \47\ See Regulation Best Interest, Exchange Act Release No. 
86031 (June 5, 2019) (adopting rule 15l-1 under the Exchange Act 
(``Regulation Best Interest'')) (``Regulation Best Interest 
Release''). Along with adopting Regulation Best Interest, the 
Commission is clarifying standards of conduct for investment 
advisers. See Commission Interpretation Regarding Standard of 
Conduct for Investment Advisers, Advisers Act Release No. 5248 (June 
5, 2019) (``Fiduciary Release''). The Commission is also providing 
guidance about when a broker-dealer's advisory services are solely 
incidental to the conduct of the business of a broker or dealer. See 
Commission Interpretation Regarding the Solely Incidental Prong of 
the Broker-Dealer Exclusion to the Definition of Investment Adviser, 
Advisers Act Release No. 5249 (June 5, 2019) (``Solely Incidental 
Release'').
---------------------------------------------------------------------------

    Some commenters responding to the RAND 2018 report noted that the 
RAND 2018 survey and qualitative interviews did not objectively test 
investor comprehension, and they pointed to observations from RAND 2018 
interviews that suggested that some interview participants failed to 
understand differences in the legal standards that apply to brokerage 
and advisory accounts and did not understand the meaning of the word 
``fiduciary'' for example.\48\ They argued that we should conduct more 
usability testing before adopting Form CRS and Regulation Best 
Interest.\49\
---------------------------------------------------------------------------

    \48\ See CFA Letter II (noting that the testing conducted for 
the RAND 2018 Report is limited and does not provide more detailed 
information, such as transcripts of the in-depth interviews, to 
present fully the level of investor understanding); Comment Letter 
of CFA Institute (May 16, 2019) (``CFA Institute Letter II'') (``The 
RAND Report is clear that its survey was not designed to measure 
objective comprehension . . . Nor did it provide respondents with 
alternatives that could have allowed them to express preferences for 
certain formats or language.''). See also AFL-CIO Letter; Consumer 
Reports Letter; Comment Letter of PIABA (Dec. 7, 2018).
    \49\ See, e.g., AFL-CIO Letter (``If the Commission chooses to 
maintain different standards for brokers and advisers, it must 
clearly delineate what the differences are . . . This would require 
rethinking the Form CRS and re-testing to ensure that it achieves 
these goals . . .''); CFA Letter II (``make the [RAND 2018] report 
the start, not the end, of an iterative process of testing and 
revision needed to develop disclosure that works . . .''); AFL-CIO, 
CFA Letter (stating ``. . . unless the Commission retests the 
revised disclosure, it won't have any way to know whether the 
revised version solves the problems that earlier testing has 
identified.''); Consumer Reports Letter (``SEC must test and retest 
Form CRS disclosures . . . and continue to publish the results of 
its testing before the form is made final''); CFA Institute Letter 
II. Others commented on the results of the RAND 2018 report but did 
not suggest delaying adoption of Form CRS. See, e.g., Comment Letter 
of Charles Schwab & Co. Inc. (Dec. 7, 2018) (``Schwab Letter II'') 
(``The Commission should acknowledge and act on consensus findings 
to improve the Form CRS''); Betterment Letter II (noting that the 
RAND 2018 report ``demonstrates that Form CRS serves a valuable 
function''). See also FSI Letter II (encouraging the Commission to 
``continue investor testing of Form CRS after the final rule is in 
place'').
---------------------------------------------------------------------------

    We disagree. The amount of information available from the various 
investor surveys and investor testing described in this release, 
including those submitted by commenters, as well as the comment letters 
and other input submitted to the Commission for this rulemaking, is 
extensive. We considered all of this information thoroughly, leveraging 
our decades of experience with investor disclosures, when evaluating 
changes to the relationship summary from the proposal. The perceived 
usefulness of the relationship summary, as shown by observations in the 
RAND 2018 report, surveys and studies submitted by commenters, and 
input from individual investors at our roundtables and in Feedback 
Forms, demonstrates that, even as proposed, the relationship summary 
would benefit investors by providing information that would help 
investors make more informed choices when deciding among firms and 
account options.\50\ Large majorities of participants in the RAND 2018 
survey and in other surveys supported the specific topics, such as 
services, fees, conflicts and standards of conduct, that we require 
firms to address in the relationship summary.\51\ Even though the RAND 
2018 qualitative interviews and another interview-based study observed 
that interview participants could have some gaps in understanding, 
these studies still observed that interview participants could learn 
new important information from the relationship summary as 
proposed.\52\
---------------------------------------------------------------------------

    \50\ See supra footnotes 22 to 30 and accompanying text. We note 
that the Department of Labor did not describe or reference usability 
testing in adopting its now vacated rule broadening the definition 
of fiduciary investment advice under the Employee Retirement Income 
Security Act of 1974 as amended (``ERISA'') and the related Best 
Interest Contract Exemption (``BIC Exemption''). The BIC Exemption 
required certain disclosures to be provided to a retirement investor 
and included on a financial institution's public website. See DOL, 
Best Interest Contract Exemption, 81 FR 21002, 21045-52 (Apr. 8, 
2016).
    \51\ See supra footnotes 23 to 24 and accompanying text; see 
also Schwab Letter (Koski), supra footnote 21 (reporting that retail 
investors say it is most important for firms to communicate about 
``costs I will pay for investment advice,'' a ``description of 
advice services,'' the ``obligations the firm and its 
representatives owe me'' and any ``conflicts of interest related to 
the advice I receive''); CCMC Letter (investor polling), supra 
footnote 21 (reporting as issues that ``matter most'' to investors, 
``explaining fees and costs,'' explaining conflicts of interest'' 
and ``explaining own compensation'').
    \52\ See RAND 2018, supra footnote 13 (describing that 
participants in qualitative interviews had difficulty reconciling 
the information provided in the obligations section and conflicts of 
interest section and other areas of confusion, but concluding that 
``[p]articipants demonstrated evidence of learning new information 
from the relationship summary''); Kleimann I, supra footnote 19 
(although study author concluded that, overall, participants had 
difficulty with ``sorting out similarities and differences,'' the 
study reports that ``nearly all participants easily identified a key 
difference between Brokerage Accounts and Advisory accounts as the 
fee structure;'' ``[p]articipants expected to pay for transactions 
in a Brokerage Account or the quarterly fee for an Advisory 
Account;'' ``most participants understood that both Brokerage 
Accounts and Advisory Accounts could have financial relationships 
with other companies that could be potential conflicts with clients' 
best interests'' and ``[nearly all participants saw the Key 
Questions as essential . . . straightforward and raised important 
questions that they themselves might not have thought to ask.''); 
see also Betterment Letter I (Hotspex) supra footnote 18 (83% of 
respondents correctly identified as ``true'' a statement that ``some 
investment firms have a conflict of interest because they benefit 
financially from recommending certain investments'' when viewing a 
version of the standalone adviser relationship summary constructed 
based on the instructions set forth in the proposal).
---------------------------------------------------------------------------

    In addition, as noted above and discussed in further detail below, 
we are making a number of modifications designed to improve the 
relationship summary relative to the proposal, which are informed by 
these and other observations reported by RAND 2018 and other surveys 
and studies, as well as by investor feedback at roundtables and in 
Feedback Forms and the other comment letters we have received. For 
example, we are substantially revising our approach to disclosing 
standard of conduct and conflicts of interest to make this information 
clearer to retail investors, including (among other changes) 
eliminating the word ``fiduciary'' and requiring firms--whether broker-
dealers, investment advisers, or dual registrants--to use the term 
``best interest'' to describe their applicable standard of conduct.\53\ 
Further, as compared to the proposal, modifications adopted in the 
final relationship summary instructions require less prescribed 
wording, and instead, firms will generally use their own wording to 
address required topics, which creates flexibility in providing 
accurate information to investors. We believe that this modification 
substantially limits the practicability and benefit of additional 
usability testing because there is no single version of the 
relationship summary (or a limited set of form versions) that may be 
used to gauge investor comprehension given firms' flexibility to tailor 
their relationship summary.\54\

[[Page 33500]]

Therefore, we believe that any anticipated benefit from continued 
rounds of investor usability testing does not justify the cost to 
investors of delaying a rulemaking designed to increase investor 
protection.
---------------------------------------------------------------------------

    \53\ See infra, Section II.B.3.
    \54\ In this regard, the RAND 2018 report and surveys and 
studies submitted by commenters generally were based on sample 
versions of the relationship summary that we included in the 
proposal. Alternate designs tested by commenters generally used the 
all of the same topics (e.g., a description of service and the 
relationship, fees and costs, standard of care, conflicts, 
additional information and key questions) as the proposed sample 
versions, with changes using different versions of prescribed 
wording and formatting designed to be more appealing to readers. See 
Kleimann II, supra footnote 19 (describing alternative Form CRS 
design assumptions) and Betterment Letter I (Hotspex) supra footnote 
18 (describing approach to optimizing the Form CRS). Given 
modifications that we are adopting to the Form CRS instructions that 
provide firms more flexibility to use their own wording to describe 
service offerings, fees and costs and their conflicts of interest 
and more flexibility in formatting as compared to the proposal, we 
are not preparing sample or illustrative versions of the 
relationship summary that could be used to repeat such surveys and 
testing, and we do not believe that we would be able to develop 
sample versions that would be representative given the diversity 
among firms in their service and product offerings.
---------------------------------------------------------------------------

    Accordingly, we believe that the totality of input received through 
comments (including Feedback Forms), outreach at roundtables and 
through the OIAD/RAND and RAND 2018 reports, as well as surveys and 
studies submitted by commenters, fully supports our consideration and 
adoption of the relationship summary, with modifications informed by 
this input as discussed more fully below. However, to help ensure that 
the relationship summary fulfills its intended purpose, we have 
directed our staff to review a sample of relationship summaries that 
are filed with the Commission beginning after June 30, 2020, when firms 
first file their relationship summaries, and to provide the Commission 
with the results of this review. The Commission and its staff are also 
reviewing educational materials provided on Investor.gov and intend to 
develop additional content in order to continue to improve the 
information available to investors about working with investment 
advisers, broker-dealers, individual financial professionals, and 
investing.
    In the Proposing Release, we proposed certain disclosures to be 
included in all print or electronic retail investor communications by 
broker-dealers, investment advisers, and their financial professionals 
(the ``Affirmative Disclosures''). We have determined not to adopt the 
Affirmative Disclosures, as we discuss further below. In our view, the 
combination of the disclosure requirements in Form CRS and Regulation 
Best Interest should adequately address the objectives of the proposed 
Affirmative Disclosures.

II. Form CRS Relationship Summary

A. Presentation and Format

    The relationship summary is designed to be a short and accessible 
disclosure for retail investors that helps them to compare information 
about firms' brokerage and/or investment advisory offerings and 
promotes effective communication between firms and their retail 
investors.\55\ The proposed instructions included requirements on 
length, formatting, and content. The proposal also provided three 
examples of what a relationship summary might look like for a 
standalone broker-dealer, standalone investment adviser, and dual 
registrant. In providing feedback on the proposed sample relationship 
summaries, commenters on Feedback Forms and participants in the RAND 
2018 survey and other surveys and studies provided by commenters 
indicated that the proposed relationship summary could be too dense and 
difficult to read.\56\ They suggested using simpler terms and more 
white space, among other changes.\57\ Commenters also encouraged the 
use of design principles that would result in a more visually appealing 
and accessible disclosure.\58\ In addition, the IAC recommended, 
through a majority vote, uniform, simple, and clear summary disclosures 
to retail investors.\59\ We have incorporated many of these suggestions 
into the instructions.
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    \55\ Form CRS defines ``relationship summary'' as ``[a] 
disclosure prepared in accordance with these Instructions that you 
must provide to retail investors'' and also references Advisers Act 
rule 204-5 and Exchange Act rule 17a-14. Firms that do not have any 
retail investors to whom they must deliver a relationship summary 
are not required to prepare or file one. See General Instructions to 
Form CRS, Advisers Act rule 204-5, Exchange Act rule 17a-14(a).
    \56\ See Feedback Forms Comment Summary, supra footnote 11 
(summary of responses to Questions 1 and 4) (33 commenters (35%) 
answered ``Somewhat'' or ``No'' in either of Question 3(a) (Do you 
find the format of the Relationship Summary easy to follow?) or 
Question 3(c) (Is the Relationship Summary easy to read?); comments 
responding to Question 4 (``Are there topics in the relationship 
summary that are too technical or that could be improved?''); 41 
Feedback Forms (44%) indicated in response to Question 4 or another 
question that the relationship summary was too technical or 
suggested one or more topics that could be improved); see also RAND 
2018, supra footnote 13 (on average, 24% of respondents described 
any given section as difficult or very difficult, more than 30% 
described the fees and costs section as difficult or very difficult; 
but qualitative interview discussions revealed that there were areas 
of confusion for participants, including differences between account 
types or financial professionals); Betterment Letter I (Hotspex) 
supra footnote 18 (only 22% of respondents reviewing a version of 
the standalone adviser relationship summary said information was 
easy to understand; only 18% said the format was appealing); 
Kleimann I, supra footnote 19 (finding that participants were 
confused). Cf. Cetera Letter II (Woelfel), supra footnote 17 (more 
than 75% of respondents strongly or somewhat agreed that individual 
topics covered by the relationship summary were described clearly). 
See also comments discussed supra footnote 35.
    \57\ Comment Letter of Front Street Consulting (Jun. 8, 2018) 
(stating that disclosure must be readable and understandable using 
plain language); Kleimann II, supra footnote 19 (describing design 
and content principles for a redesigned relationship summary, noting 
that ``[h]eading and white space allow readers to have an overview 
of the content, see the overall structure of the content, and choose 
which parts most interest them . . .''); IAA Letter I (recommending 
flexibility for innovative use of design techniques including 
``using more white space, and using visuals like icons and 
images''); Fidelity Letter (discussing designed relationship summary 
using ``key design elements that are informed by our experienced 
employees whose focus is on graphic design and applying design 
thinking techniques to customer facing products''). Schwab Letter I 
(Koski), supra footnote 21 (reporting that the ``majority of retail 
investors surveyed want communications that are relevant to them 
(91%), short and to the point (85%), and visually appealing 
(79%)''); Schwab Letter II (stating that combined results of RAND 
2018 and its own survey indicate that the Form CRS should be 
shorter, organized around questions, focus on ``fees/costs'' and 
``services/relationships'' and contain ``hyperlinks''); Betterment 
Letter I (Hotspex), supra footnote 18 (providing suggestions for 
streamlining and focusing the content requirements and improving the 
visual layout and format of the relationship summary to improve its 
effectiveness).
    \58\ See, e.g., Betterment Letter II (``The form should better 
implement design principles that have been shown to facilitate 
visual appeal and comprehension.''); Schwab Letter I (citing to a 
presentation given by Kleimann Communication Group, Inc., at an IAC 
meeting on June 14, 2018); IAA Letter I (arguing that more visually 
dynamic and engaging design would make the relationship summary more 
effective and likely to be read).
    \59\ See IAC Form CRS Recommendation, supra footnote 10 
(reiterating a recommendation from the IAC Broker-Dealer Fiduciary 
Duty Recommendations in 2013 to ``adopt a uniform, plain English 
disclosure document to be provided to customers and potential 
customers of broker-dealers and investment advisers that covers 
basic information about the nature of services offered, fees and 
compensation, conflicts of interest, and disciplinary record'' and 
recommending that the Commission work with a design expert and test 
the relationship summary for effectiveness).
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    We are changing the instructions to require a question-and-answer 
format, give additional support for electronic formats, provide 
guidance that firms should include white space, and implement other 
design features to make the relationship summary easier to read.\60\ We 
are requiring firms to use standardized headings in a prescribed order 
to preserve comparability, while permitting greater flexibility in 
other aspects of the relationship summary's wording and design to 
enhance the relationship summary's accuracy, usability, and 
effectiveness.\61\ The final instructions will require limited 
prescribed wording compared to the

[[Page 33501]]

proposal and will permit firms to use their own wording to describe 
most topics. We also are not requiring firms to discuss the sub-topics 
required within each section in a prescribed order, as proposed.\62\ 
Dual registrants \63\ and affiliated brokerage and investment advisory 
firms also will have flexibility to decide whether to prepare separate 
or combined relationship summaries. These changes are intended to 
enhance the relationship summary's clarity, usability, and design, and 
to promote effective communication and understanding between retail 
investors and their firms and financial professionals. We describe 
these changes in more detail below.
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    \60\ General Instruction 2.A. to Form CRS. (``You should include 
white space and implement other design features to make the 
relationship summary easy to read.'').
    \61\ See, e.g., Items 2.B. and 3.C.(ii) of Form CRS.
    \62\ See Proposed General Instruction 1.(b) to Form CRS 
(``Unless otherwise noted, you must also present the required 
information within each item in the order listed.'').
    \63\ Form CRS defines ``dual registrant'' as ``A firm that is 
dually registered as a broker or dealer registered under section 15 
of the Exchange Act and an investment adviser registered under 
section 203 of the Advisers Act and offers services to retail 
investors as both a broker-dealer and an investment adviser.'' 
General Instruction 11.C. to Form CRS. This definition varies from 
the one proposed in that it includes only those investment advisers 
registered with the SEC, rather than with the States. For the 
avoidance of doubt, it also includes the statutory registration 
provisions for broker-dealers and investment advisers.
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    We are also adopting some parts of the instructions that address 
presentation and formatting as proposed. The instructions state that 
the relationship summary should be concise and direct, and firms must 
use plain English and take into consideration retail investors' level 
of financial experience, as proposed.\64\ Firms also are not permitted 
to use multiple negatives, or legal jargon or highly technical business 
terms unless firms clearly explain them, as proposed. In a change from 
the proposal, the instructions will not permit use of legal jargon or 
technical terms without explaining them in plain English, even if the 
firm believes that reasonable retail investors will understand those 
terms.\65\ Several commenters suggested that the relationship summary 
avoid the use of jargon (e.g., terms like ``asset-based fee'' and 
``load'' in the fees section),\66\ and several roundtable participants 
and participants in the RAND 2018 interviews and another study said 
that they did not understand certain technical terms.\67\ Roundtable 
participants and commenters on Feedback Forms asked that the 
relationship summary include definitions or a glossary.\68\ In 
addition, the IAC recommended that a document such as the relationship 
summary use plain English and a concise format.\69\ As a result, we are 
instructing firms to avoid using legal jargon and highly technical 
terms in the relationship summary unless they are able to explain the 
terms in the space of the relationship summary. We believe this simpler 
approach obviates the need for firms to justify what they believe a 
reasonable retail investor would or would not understand. Firms would 
have the flexibility to use their own wording, including legal or 
highly technical terms as long as they explain them, or may prefer to 
use simpler terms, given the space limitations of the relationship 
summary. Additionally, we have added a cover page for Form CRS under 
the Exchange Act (17 CFR 249.640) only, displaying a currently valid 
OMB control number and including certain statements relating to federal 
information law and requirements, and the SEC's collection of 
information.\70\
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    \64\ See General Instruction 2.A. to Form CRS (providing that 
firms should (i) use short sentences and paragraphs; (ii) use 
definite, concrete, everyday words; (iii) use active voice; (iv) 
avoid legal jargon or highly technical business terms unless firms 
clearly explain them; and (v) avoid multiple negatives. Firms must 
write their responses to each item as if speaking to the retail 
investor, using ``you,'' ``us,'' ``our firm,'' etc.). Delivery of 
the relationship summary will not necessarily satisfy the additional 
requirements that broker-dealers and investment advisers have under 
the federal securities laws and regulations or other laws or 
regulations. See General Instruction 2.D. to Form CRS; Proposed 
General Instruction 3 to Form CRS.
    \65\ General Instruction 2.A. to Form CRS. Compare to Proposed 
General Instruction 2 to Form CRS (``. . . avoid legal jargon or 
highly technical terms unless you clearly explain them or you 
believe that reasonable retail investors will understand them . . 
.'').
    \66\ CFA Letter I; AARP Letter; IAA Letter I.
    \67\ See, e.g., Miami Roundtable; Houston Roundtable; 
Philadelphia Roundtable; RAND 2018, supra footnote 13 (in 
qualitative interviews participants asked for definitions of 
``transaction-based fee,'' ``asset-based fee,'' and struggled with 
terms such as ``mark-up,'' ``mark-down,'' ``load,'' surrender 
``charges'' and ``wrap fee''); see also Kleimann I, supra footnote 
19.
    \68\ See, e.g., Philadelphia Roundtable, at 64 (participant 
recommending a glossary at the end of the relationship summary); 
Washington, DC Roundtable, at 31 (``You might want to consider a 
glossary of terms.''); Feedback Forms Comment Summary, supra 
footnote 11 (summary of comments to Question 4) (10 comments asked 
for a definition or a better explanation of the term ``fiduciary,'' 
seven asked for definitions of terms such as transaction-based fee, 
asset-based fee or wrap fee); see also Anonymous 18 Feedback Form 
(``A glossary would be nice--not in ``legalize'' [sic] language'').
    \69\ See IAC Broker-Dealer Fiduciary Duty Recommendations, supra 
footnote 10; and IAC Form CRS Recommendation, supra footnote 10.
    \70\ Under the Advisers Act, Form CRS is Part 3 of Form ADV, 
which already contains a cover page.
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1. Limited Prescribed Wording
    The proposed instructions would have required firms to include 
prescribed wording throughout many sections of the relationship 
summary. In particular, the fees and costs, standard of conduct, and 
the comparison section for standalone broker-dealers and investment 
advisers included a number of required statements, many that differed 
for broker-dealers, investment advisers, and dual registrants.\71\ The 
introduction, conflicts of interest, and key questions sections also 
included some required statements.\72\ In response to comments (as 
described more fully below) we are largely eliminating the prescribed 
wording and replacing those statements with instructions that generally 
allow firms to describe their own offerings with their own wording.
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    \71\ See infra discussion at Sections II.B.3 (fees and costs and 
standard of conduct) and II.B.6 (proposed items omitted in final 
instructions).
    \72\ See infra discussion at Sections II.B.1 (introduction) and 
II.B.3 (conflicts of interests) and supra Section II.A.4 
(conversation starters).
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    For example, the proposed instructions would have required broker-
dealers to state, ``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'' and ``The fee you pay is based on 
the specific transaction and not the value of your account.'' \73\ 
Broker-dealers also would have stated ``The more transactions in your 
account, the more fees we charge you. We therefore have an incentive to 
encourage you to engage in transactions.'' \74\ Instead the final 
instructions will require broker-dealers to describe the principal fees 
and costs that retail investors will incur, including their 
transaction-based fees, and summarize how frequently the fees are 
assessed and the conflicts of interest they create.\75\
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    \73\ Proposed Items 2.B.1. and 4.B.1. of Form CRS.
    \74\ Proposed Item 4.B.5. of Form CRS.
    \75\ See Items 3.A. through 3.C. of Form CRS.
---------------------------------------------------------------------------

    Many commenters requested more flexibility for firms to provide 
accurate descriptions of their services.\76\ Some

[[Page 33502]]

argued that the mix of prescribed and firm-authored wording required by 
the proposed instructions would be inaccurate, contribute to investor 
confusion, or be ineffective for investors, particularly language that 
some commenters considered ``boilerplate.'' \77\ Observations reported 
in the RAND 2018 qualitative interviews and other surveys and studies 
also showed that investors had difficulty understanding, were confused 
by, or misinterpreted some of the prescribed wording.\78\ A range of 
commenters asserted that the proposed prescribed wording could be 
inaccurate or inapplicable.\79\ For example, various providers of 
insurance products explained that references to brokerage or investment 
advisory accounts were not consistent with their business models and 
could confuse retail investors because customers generally purchase 
insurance products directly from the issuer, without needing to open a 
brokerage account.\80\ One commenter expressed concern that some of the 
prescribed wording could constitute impermissible compelled speech that 
could raise First Amendment concerns.\81\ That same commenter, with 
others, also opposed providing firms with more flexibility than 
proposed to implement the relationship summary, arguing that more 
flexibility could impair comparability.\82\
---------------------------------------------------------------------------

    \76\ See, e.g., IAA Letter I; Comment Letter of Massachusetts 
Mutual Life Insurance Company (Aug. 7, 2018) (``MassMutual 
Letter''); Comment Letter of the Association for Advanced Life 
Underwriting (Aug. 7, 2018) (``AALU Letter''); Comment Letter of 
Prudential Financial, Inc. (Aug. 7, 2018) (``Prudential Letter''); 
Comment Letter of Mutual of America Life Insurance Company (Aug. 3, 
2018) (``Mutual of America Letter''); Comment Letter of John Hancock 
Life Insurance Company (U.S.A.) (Aug. 3, 2018) (``John Hancock 
Letter''); ACLI Letter; Comment Letter of New York Life Insurance 
Company (Aug. 7, 2018) (``New York Life Letter''); Comment Letter of 
Transamerica (Aug. 7, 2018) (``Transamerica Letter''); Vanguard 
Letter. See also Betterment Letter I, supra footnote 18 (arguing 
that investor survey conducted by Hotspex showed that its more 
customized version of the relationship summary facilitated investor 
understanding). Some individuals submitting Feedback Forms also 
preferred more firm-specific information. See, e.g., Anonymous 13 
Feedback Form (``Firm-specific info would be nice on this 
document.''); Bhupalam Feedback Form (``I would like to see 
additional information regarding specific firm rather than a general 
description.''); Christine Feedback Form (``I'm interested in my 
individual advisor's orientation--small cap, mid cap, large cap or 
mix growth vs. value foreign, domestic or mix fundamental or 
quantitative long term or short term'').
    \77\ ASA Letter (``[T]he mix of prescribed and customized 
language will only create more confusion and complexity, as well as 
legal risk for financial institutions.''); Primerica Letter (``This 
mix of prescribed and flexible disclosure would ultimately result in 
a patchwork of new disclosures that fail to comprehensively describe 
a particular firm's business model in a way that is accessible and 
digestible by retail investors.''); IAA Letter I (``Many firms would 
. . . be compelled to explain to prospective clients how and why 
their business is different from the boilerplate descriptions and 
why the comparisons are not applicable. The boilerplate language may 
thus detract from a firm's ability to explain its own services and 
make it harder for investors to understand those services.'').
    \78\ E.g., RAND 2018, supra footnote 13 (describing that, in 
qualitative interviews, participants noted some words or phrases 
that needed further definition and some misunderstood differences 
between account types and professionals); Kleimann I, supra footnote 
19; Betterment Letter I (Hotspex) supra footnote 18 (finding that 
investors had difficulty understanding certain key information on 
the SEC sample version of standalone investment adviser relationship 
summary); see also Kleimann II, supra footnote 19 (investors 
misconstrued the legal standard in alternative versions of 
prescribed wording used in a redesigned version of the relationship 
summary); Feedback Forms Comment Summary, supra footnote 11 (summary 
of responses to Question 4) (41 Feedback Forms included narrative 
responses that indicated that one or more topics were too technical 
or could be improved; of these, 20 indicated that the relationship 
summary language was too technical, wordy, confusing or should be 
simplified; 23 indicated that information on fees and costs was too 
technical or needed to be more clear; 23 suggested that information 
in sections on relationships and services and obligations needed 
clarification, and 14 suggested clarification or more information 
about conflicts of interest).
    \79\ See, e.g., IAA Letter I; ACLI Letter; AARP Letter; SIFMA 
Letter; FSI Letter I; Triad Letter; Vanguard Letter.
    \80\ See, e.g., Comment Letter of the Committee of Annuity 
Insurers (Aug. 7, 2018) (``Committee of Annuity Insurers Letter'') 
(``The use of the term `brokerage account may be confusing to retail 
investors purchasing and owning annuities, as annuities are 
typically `held' directly by an insurance company.''); ACLI Letter; 
IAA Letter I; FSI Letter I; Comment Letter of Lincoln Financial 
Group (Nov. 13, 2018) (``Lincoln Financial Group Letter'') (``Sales 
of variable annuities, and variable life insurance products, 
typically do not involve the opening of a brokerage account and are 
not conducted in a brokerage account.'').
    \81\ See CFA Letter I, supra footnote 37.
    \82\ See AFL-CIO, CFA Letter.
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    We recognize that extensive use of prescribed wording in certain 
contexts could add to investor confusion and may not accurately or 
appropriately capture information about particular firms. Accordingly, 
the final instructions permit firms, within the parameters of the 
instructions, to describe their services, investment offerings, fees, 
and conflicts of interest using their own wording. This approach should 
enable firms to reflect accurately what they offer to retail investors, 
should result in disclosures that are more useful to retail investors, 
and should mitigate concerns relating to the mix of prescribed and 
firm-authored wording, and the extensive use of prescribed wording, 
that the proposed instructions required.
    Although we are allowing more flexibility so that firms can 
describe their offerings more accurately, firms still will be required 
to discuss required topics within a prescribed order, as discussed 
below.\83\ This approach will facilitate transparency, consistency, and 
comparability of information across the relationship summaries of 
different firms, helping retail investors to focus on information that 
we believe would be particularly helpful in deciding among firms, 
financial professionals, services, and accounts--namely: Relationships 
and services; fees, costs, conflicts, and required standard of conduct; 
disciplinary history; and how to get additional information. We believe 
that more tailored, specific, and distinct information in the required 
topic areas also will better serve the educational purpose by 
facilitating more robust substantive comparisons across firms.
---------------------------------------------------------------------------

    \83\ See, e.g., General Instructions 1.A and 1.B., and 2.B. to 
Form CRS.
---------------------------------------------------------------------------

    This approach addresses--and mitigates--First Amendment concerns. 
Generally, the instructions no longer require any specific speech.\84\ 
Rather, they permit firms to use their own words to impart accurate 
information to investors. In certain circumstances, however, we are 
continuing to require firms to use prescribed wording. For example, the 
final instructions require firms to use standardized headings and 
conversation starters, which are in the form of questions that 
investors are encouraged to ask.\85\ These elements are organizational 
(the headings) or intended to prompt a discussion by the investor (the 
conversation starters).\86\ The final instructions also require firms 
to include prescribed statements describing their required standard of 
conduct when providing recommendations or advice.\87\ Requiring firms 
to provide a consistent articulation of their required legal 
obligations in this regard will reduce and minimize investor confusion, 
as compared with allowing firms to state their required standard of 
conduct using their own wording.\88\ These statements are designed to 
require the disclosure of purely factual information about the standard 
of conduct that applies to the provision of recommendations by broker-
dealers and the provision of advice by investment advisers under their 
respective legal regimes.\89\ Finally, the instructions require firms 
to include a prescribed, factual statement regarding the impact of fees 
and costs on investments, and a prescribed statement encouraging retail 
investors to understand what fees and costs they are paying.\90\ As 
explained further below,

[[Page 33503]]

the final instructions provide that if a required disclosure or 
conversation starter is inapplicable to a firm's business or specific 
wording required by the instructions is inaccurate, firms may omit or 
modify it.\91\
---------------------------------------------------------------------------

    \84\ For example, the final instructions no longer require the 
proposed Comparisons section or other prescribed wording that could 
be perceived as requiring firms to compare their owns services 
unfavorably to those of their competitors. See infra Section II.B.6.
    \85\ See infra Sections II.A.2 and II.A.4.
    \86\ See infra Sections II.A.2. and II.A.4.
    \87\ Item 3.B.(i) of Form CRS. See infra Section II.B.3.b.
    \88\ See infra Sections II.A.2 and II.B.3.b.
    \89\ See Milavetz, Gallop & Milavetz, P.A. v. United States, 559 
U.S. 229, 249-50 (2010) (upholding against First Amendment challenge 
a requirement that lawyers disclose their ``legal status'' and ``the 
character of the assistance provided''); Zauderer v. Office of 
Disciplinary Counsel, 471 U.S. 626, 651 (1985) (upholding required 
disclosure of factual information about terms of service); Pharm. 
Care Mgmt. Ass'n v. Rowe, 429 F.3d 294, 310 (1st Cir. 2005) 
(upholding requirement that pharmacy benefit managers disclose 
conflicts of interest and financial arrangements).
    \90\ See Item 3.A.(iii) of Form CRS (requiring firms to state, 
``You will pay fees and costs whether you make or lose money on your 
investments. Fees and costs will reduce any amount of money you make 
on your investments over time. Please make sure you understand what 
fees and costs you are paying.''). See also infra footnotes 424-425 
and accompanying text.
    \91\ See General Instruction 2.B to Form CRS. We are adopting 
this provision to ensure that firms are not compelled to include 
wording in their relationship summaries that is misleading or 
inaccurate in the context of their business models. This provision 
may apply in limited circumstances. For example, the headings and 
conversation starters prescribed by the final instructions are 
worded at a highly generalized level and cover selected key topics 
that are broadly applicable to broker-dealers and investment 
advisers and their relationships with retail investors, irrespective 
of business model (i.e., relationships and services the firm offers 
to retail investors, fees and costs that retail investors will pay, 
specified conflicts of interest and standards of conduct, and 
disciplinary history).
---------------------------------------------------------------------------

    As in the proposal, the final instructions include parameters for 
the scope of information expected within the relationship summary, 
though we are modifying the requirements to clarify the scope further 
in light of commenter concerns. First, all information in the 
relationship summary must be true and may not omit any material facts 
necessary in order to make the disclosures, in light of the 
circumstances under which they were made, not misleading.\92\ The 
proposed instructions required all information in the relationship 
summary to be true and prohibited firms from omitting any material 
facts necessary to make the disclosures required by the instructions 
and the applicable item not misleading, but did not include the clause 
``in light of the circumstances under which they were made.'' \93\ 
Commenters raised concerns with respect to the applicability of this 
standard to a short document with strict page limits that is meant to 
provide only a brief summary of information.\94\
---------------------------------------------------------------------------

    \92\ General Instruction 2.B. to Form CRS (``All information in 
your relationship summary must be true and may not omit any material 
facts necessary in order to make the disclosures required by these 
Instructions and the applicable Item, in light of the circumstances 
under which they were made, not misleading.''). Cf. Proposed 
Instruction 3 to Form CRS (``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.'').
    \93\ Proposed General Instruction 3 to Form CRS.
    \94\ See, e.g., LPL Financial Letter (raising concerns that the 
relationship summary raises the risk of liability for material 
omissions given its page limits and required level of detail); CCMC 
Letter (``The page and length limitations imposed by the proposed 
regulation, coupled with the required disclosure that is mandated by 
the proposed rules, present a substantial risk of liability for 
omissions that may be necessary only to ensure the disclosure meets 
the Commission's strict formatting requirements.''); Fidelity Letter 
(stating that firms ``would find it very challenging to summarize 
their offerings within the four-page limit and other content and 
formatting constraints of the form as proposed, let alone to do so 
in a manner that provides sufficient detail to convey meaningful 
information to investors, and is sufficiently accurate to avoid 
creating liability for a misstatement'').
---------------------------------------------------------------------------

    We continue to believe that firms should include only as much 
information as is necessary to enable a reasonable investor \95\ to 
understand the information required by each item.\96\ As discussed 
below, we believe that investors will benefit from receiving a 
relationship summary containing high-level information that they will 
be more likely to read and understand, with the ability to access more 
detailed information.\97\ As a result, we recognize a firm's 
relationship summary by itself is a summary of the information required 
to inform retail investors about the services a firm provides along 
with its fees, costs, conflicts of interest, and standard of conduct. 
We also believe that the disclosure provided in the relationship 
summary should be responsive and relevant to the topics covered by the 
final instructions,\98\ and not omit information that is required to be 
disclosed or necessary to make the required disclosure not 
misleading.\99\ We are sensitive to commenters' concerns, however, 
regarding expectations for the scope of required information within 
page limits. In this regard, the instructions continue to provide, as 
proposed, that firms may not include a disclosure in the relationship 
summary other than a disclosure that is required or permitted by the 
instructions and the applicable item,\100\ and that all the information 
contained in the relationship summary must be true.\101\
---------------------------------------------------------------------------

    \95\ The proposed instructions referred to a ``reasonable retail 
investor.'' For example, under the proposed instructions, firms 
would have been able to omit or modify prescribed wording or other 
statements required to be part of the relationship summary if such 
statements were inapplicable to a firm's business or would have been 
misleading to a ``reasonable retail investor.'' See Proposed General 
Instruction 3 to Form CRS. The final instructions no longer make 
reference to a ``reasonable retail investor.'' By eliminating the 
reference to a ``reasonable retail investor,'' we are clarifying 
that we did not intend at the proposal, and do not intend now, to 
introduce a new standard under the federal securities laws, which 
generally refer to what a ``reasonable investor'' would consider 
important in making a decision. See infra footnotes 95-105 and 
accompanying text. References to a ``reasonable retail investor'' in 
the proposed instructions were meant to clarify how the operative 
Instruction or Item would apply in the context of a retail investor. 
Because new rule 17a-14 under the Exchange Act and new rule 204-5 
under the Advisers Act require firms to deliver relationship 
summaries to retail investors in accordance with such rules, we do 
not believe such clarifications are necessary.
    \96\ General Instruction 2.A. to Form CRS. The instructions 
remind firms to use not only short sentences as proposed, but also 
short paragraphs. General Instruction 2.A.(i) to Form CRS.
    \97\ See infra Section II.A.3.
    \98\ 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, including 
statements made in response to the relationship summary's 
``conversation starters.'' See infra Section II.B.2.c.
    \99\ This approach is consistent with the approach the 
Commission has taken with respect to disclosure more broadly. See, 
e.g., rule 408(a) under Regulation C [17 CFR 230.408(a)] (``In 
addition to the information expressly required to be included in a 
registration statement, there shall be added such further material 
information, if any, as may be necessary to make the required 
statements, in the light of the circumstances under which they are 
made, not misleading''); Exchange Act rule 12b-20 [17 CFR 240.12b-
20] (``In addition to the information expressly required to be 
included in a statement or report, there shall be added such further 
material information, if any, as may be necessary to make the 
required statements, in the light of the circumstances under which 
they are made not misleading''); see also Commission Statement and 
Guidance on Public Company Cybersecurity Disclosures, Securities Act 
Release No. 82746 (Feb. 21, 2018) [83 FR 8166 (Feb. 26, 2018)] 
(stating that the ``Commission considers omitted information to be 
material if there is a substantial likelihood that a reasonable 
investor would consider the information important in making an 
investment decision or that disclosure of the omitted information 
would have been viewed by the reasonable investor as having 
significantly altered the total mix of information available''); TSC 
Industries v. Northway, 426 U.S. 438, 449 (1976) (stating a fact is 
material ``if there is a substantial likelihood that a reasonable 
shareholder would consider it important'' in making an investment 
decision or if it ``would have been viewed by the reasonable 
investor as having significantly altered the `total mix' of 
information made available'' to the shareholder); Basic, Inc. v. 
Levinson, 485 U.S. 224, 240 (1988) (stating that ``materiality 
depends on the significance the reasonable investor would place on 
the withheld or misrepresented information''); Securities and 
Exchange Com'n v. Texas Gulf Sulphur, 258 F. Supp. 262, 279 
(S.D.N.Y. 1966) (stating that ``[a]n insider's liability for failure 
to disclose material information which he uses to his own advantage 
in the purchase of securities extends to purchases made on national 
securities exchanges as well as to purchases in `face-to-face' 
transactions''); Cochran v. Channing Corporation, 211 F. Supp. 239, 
242 (S.D.N.Y. 1962) (stating that the ``Securities Exchange Act was 
enacted in part to afford protection to the ordinary purchaser or 
seller of securities. Fraud may be accomplished by false statements, 
a failure to correct a misleading impression left by statements 
already made or, as in the instant case, by not stating anything at 
all when there is a duty to come forward and speak'').
    \100\ General Instruction 1.B. to Form CRS; see also Proposed 
General Instruction 1.(d) to Form CRS.
    \101\ General Instruction 2.B. and 2.C. to Form CRS; see also 
Proposed General Instruction 3 to Form CRS.
---------------------------------------------------------------------------

    In a change from the proposal, and to address commenters' concerns, 
the final instructions provide that the information contained in the 
relationship summary may not omit any material facts necessary in order 
to make the disclosures, in light of the circumstances under which they 
were

[[Page 33504]]

made, not misleading.\102\ We have added the phrase ``in light of the 
circumstances under which they were made'' to clarify that the content 
included or not included in the relationship summary should be viewed, 
for example, in light of the fact that the disclosure is intended to be 
a summary, that firms must adhere to the page limit, and that there 
will be links to additional information. Any information contained in 
the relationship summary or omitted facts will not be viewed in 
isolation in respect of determining whether such information would have 
been viewed by a reasonable investor as having significantly altered 
the total mix of information available.\103\ As discussed below, firms 
will provide additional detail and context through layered disclosure. 
For example, the instructions require firms to include specific 
references or a link to additional information as part of the 
relationships and services and fees and conflicts sections.\104\ In 
other instances, the instructions encourage firms to reference or link 
to additional information to supplement their required 
disclosures.\105\ While this change from the proposal is drawn from 
other areas of the federal securities laws,\106\ Form CRS is not 
intended to create a private right of action.
---------------------------------------------------------------------------

    \102\ Id.
    \103\ See rule 10b-5 under the Exchange Act [17 CFR 240.10b-5]; 
supra footnote 99 and accompanying text; see also footnote 469 and 
accompanying text.
    \104\ See infra Section II.A.3.
    \105\ See, e.g., General Instruction 3.A. to Form CRS (``You are 
encouraged to use charts, graphs, tables, and other graphics or text 
features in order to respond to the required disclosures. . . . You 
also may include: (i) A means of facilitating access to video or 
audio messages, or other forms of information (whether by hyperlink, 
website address, Quick Response Code (``QR code''), or other 
equivalent methods or technologies); (ii) mouse-over windows; (iii) 
pop-up boxes; (iv) chat functionality; (v) fee calculators; or (vi) 
other forms of electronic media, communications, or tools that 
designed to enhance a retail investor's understanding of the 
material in the relationship summary.'').
    \106\ See supra footnotes 99 and 103 and accompanying text.
---------------------------------------------------------------------------

    Second, firms may omit or modify required disclosures or 
conversation starters that are inapplicable to their business, or 
specific wording required by the final instructions that is 
inaccurate.\107\ The proposed instructions permitted firms to omit or 
modify required disclosures that were inapplicable to their business or 
would be misleading to a reasonable retail investor.\108\ We modified 
the proposed instruction to provide a more concrete requirement 
allowing firms to omit or modify prescribed wording, rather than using 
a broader standard referencing a reasonable retail investor. This 
instruction is intended to ensure that no statements are misleading or 
inaccurate in the context of a firm's particular services or business. 
Rather, the objective of the Commission is to ensure that required 
disclosures are purely factual and provide investors with an accurate 
portrayal of the firm's services and operations.
---------------------------------------------------------------------------

    \107\ General Instruction 2.B. to Form CRS.
    \108\ See Proposed General Instruction 3 to Form CRS (``If a 
statement is inapplicable to your business or would be misleading to 
a reasonable retail investor, you may omit or modify that 
statement.'').
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    Finally, given that firms will use mostly their own wording, we are 
adding instructions that remind firms that their responses must be 
factual and provide balanced descriptions to help retail investors 
evaluate the firm's services.\109\ For example, firms may not include 
exaggerated or unsubstantiated claims, vague and imprecise 
``boilerplate'' explanations, or disproportionate emphasis on possible 
investments or activities that are not made available to retail 
investors.\110\ The relationship summary is designed to serve as 
disclosure, rather than marketing material, and should not unduly 
emphasize aspects of firms' offerings that may be favorable to 
investors over those that may be unfavorable.
---------------------------------------------------------------------------

    \109\ General Instruction 2.C. to Form CRS.
    \110\ General Instruction 2.C. to Form CRS.
---------------------------------------------------------------------------

2. Standard Question-and-Answer Format and Other Presentation 
Instructions
    As with the proposed instructions, the final instructions require 
firms to present information under standardized headings and to respond 
to all the items in the final instructions in a prescribed order.\111\ 
Instead of using declarative headings as proposed, however, the 
headings will be in the form of questions.\112\ This change responds to 
feedback from surveys and studies \113\ and commenters,\114\ including 
many submitting their own mock-ups of the relationship summary that 
suggested or used a question-and-answer format in their own documents. 
Several commenters noted that the question-and-answer format is a more 
effective design for consumer disclosures because it focuses on 
questions to which a consumer wants answers and allows a consumer to 
skim quickly and understand where to get more information.\115\ Based 
on consideration of these comments, we are both incorporating the 
format generally and are utilizing several of the question headings 
suggested by commenters in mock-ups, as discussed in each item below.
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    \111\ General Instruction 1.B. to Form CRS.
    \112\ See generally Items 2.A., 3.A., 3.B., 3.C, and 4.A to Form 
CRS.
    \113\ See e.g.; RAND 2018, supra footnote 13 (reporting that 
about 60% of survey respondents preferred a question-and-answer 
format over the sample relationship summary format presented in the 
survey). Kleimann I, supra footnote 19 (``Participants liked the Key 
Questions section, but wanted the questions to be answered within 
the document.'').
    \114\ IAA Letter I (``A [question-and-answer] format will help 
keep the relationship summary short and should also remove the onus 
of the retail investor having to ask questions. This format would 
encourage further conversation, particularly if the Commission 
requires firms to point investors to additional information--
including comparison information and other key questions--on the 
SEC's website.''); Schwab Letter I (citing Kleimann Communication 
Group, Inc., Making Disclosures Work for Consumers (Jun. 14, 2018), 
available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac061418-slides-by-susan-kleimann.pdf, and 
contemporaneous discussions); Schwab Letter II (``Form CRS should be 
organized around questions''); Fidelity Letter (redesigned 
relationship summary with a question-and-answer format).
    \115\ See Kleimann II, supra footnote 19 (``Readers ask 
questions when they read, especially of functional documents . . . . 
For good design, we want to build upon this tendency by identifying 
the key questions investors should or are likely to ask and 
featuring them prominently in the text, thus easing the cognitive 
task for readers.); Schwab Letter I (``[Q]uestions that a consumer 
has . . . should be the organizing principle.''); see also CFA 
Letter I.
---------------------------------------------------------------------------

    In addition to the standardized headings, we continue to believe 
that a prescribed order of topics facilitates comparability of 
different firms' relationship summaries. Commenters generally supported 
or did not oppose the premise of a prescribed order of topics.\116\ 
Some commenters did, however, suggest changes to the organization or 
inclusion of topics, either explicitly in their comment letters, 
implicitly by the design of their own mock-ups, or both.\117\ Results 
of

[[Page 33505]]

surveys and studies that assessed comprehension of the sample proposed 
relationship summaries demonstrated the importance of context and 
revealed confusion caused by the placement of some information. For 
example, the RAND 2018 qualitative interviews suggested that investors 
were confused by and had difficulty reconciling the conflicts and 
standard of conduct sections, which were separated by the fees and 
comparisons sections.\118\ Another study suggested that the appearance 
of fee information in three separate sections and separation of the 
fees and conflicts sections by the comparisons section inhibited 
understanding of the connection between fees and conflicts.\119\ As 
discussed further below, we are combining the proposed Fees and Costs, 
Conflicts of Interest, and Standard of Conduct sections into one, to 
address these comments.\120\ In addition, in response to suggestions 
that we provide more flexibility for how firms describe their services 
so that they can more accurately convey the information, the final 
instructions do not require firms to present the information within 
each section in the order listed.\121\ Therefore, firms are free to 
discuss the required sub-topics within each item in an order that they 
believe best promotes accurate and readable descriptions of their 
business.
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    \116\ See, e.g., Trailhead Consulting Letter (supporting a 
standardized order of topics to facilitate comparability); Fidelity 
Letter (``[W]e urge the SEC to consider prescribing content and 
topics, but not specific language . . .'').
    \117\ See, e.g., CFA Letter I (suggesting changes to the order 
of the disclosures and the design of the relationship summary); IAA 
Letter I (suggesting a different order of topics and elimination of 
the Comparisons section, including by submitting its own mock-up); 
Comment Letter of Charles Schwab & Co., Inc. (Feb. 26, 2019) 
(``Schwab Letter III'') (providing sample Form CRS instructions that 
permit flexibility as to the order of sub-topics under each topic). 
On Feedback Forms, 57 (about 60%) commenters responded ``yes'' when 
asked whether information was in the appropriate order; 8 commenters 
suggested moving the Key Questions to be first or closer to the 
front of the document. See Feedback Forms Comment Summary, supra 
footnote 11 (summary of responses to Questions 3(b) and 7). A few 
commenters on Feedback Forms suggested moving the Additional 
Information section forward. See Durgin Feedback Form, Salkowitz 
Feedback Form, Starmer2 Feedback Form, Anonymous14 Feedback Form, 
and a few suggested changes to the order of discussion of 
obligations and conflicts. See Anonymous28 Feedback Form, Asen 
Feedback Form, Lee2 Feedback Form.
    \118\ See RAND 2018, supra footnote 13.
    \119\ See Kleimann I, supra footnote 19, at 30 (participants 
``had difficulty building knowledge and relating one piece to 
another when it was separated by physical space.'').
    \120\ See Item 3 of Form CRS.
    \121\ See Proposed General Instruction 1.(b) to Form CRS 
(``Unless otherwise noted, you must also present the required 
information within each item in the order listed.'').
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    The final instructions provide for page limits to promote brevity, 
as proposed. The proposed instructions limited the length of the 
relationship summary to four pages for both standalone firms and dual 
registrants.\122\ The final instructions provide that for dual 
registrants that include their brokerage services and advisory services 
in a single relationship summary, the relationship summary must not 
exceed four pages in paper format, or the equivalent if delivered 
electronically.\123\ For broker-dealers \124\ and investment advisers 
\125\ a relationship summary in paper format must not exceed two pages, 
or the equivalent if delivered electronically.\126\ Dual registrants 
that prepare separate relationship summaries for their brokerage and 
advisory services are limited to two pages each, or the equivalent if 
delivered electronically.\127\ Unlike the proposed instructions, the 
final instructions do not prescribe paper size, font size, and margin 
width, providing instead that they should be reasonable.\128\ For 
example, we believe that 8\1/2\'' x 11'' paper size, at least an 11 
point font size, and a minimum of 0.75'' margins on all sides, as 
proposed, could be considered reasonable, but other parameters could 
also be reasonable. The objective of the proposed paper, font, and 
margin size limitations was to make the relationship summary easy to 
read. We expect that a visually engaging and effective design, 
including in electronic format, could achieve the same objective 
without the prescriptive limitations.
---------------------------------------------------------------------------

    \122\ Proposed General Instruction 1.(c) to Form CRS.
    \123\ General Instruction 1.C. to Form CRS.
    \124\ Proposed Form CRS defined ``standalone broker-dealer'' as 
``a broker or dealer registered under section 15 of the Exchange Act 
that offers services to retail investors and (i) is not dually 
registered as an investment adviser under section 203 of the 
Advisers Act or (ii) is dually registered as an investment adviser 
under section 203 of the Advisers Act but does not offer services to 
retail investors as an investment adviser.'' We are not adopting 
this definition because we believe using the term ``broker-dealer'' 
is sufficient for the final instructions. The final instructions 
provide that Form CRS applies to broker-dealers registered under 
section 15 if the Exchange Act. See supra footnote 8.
    \125\ Proposed Form CRS defined ``standalone investment 
adviser'' as ``an investment adviser registered under section 203 of 
the Advisers Act that offers services to retail investors and (i) is 
not dually registered as a broker or dealer under Section 15 of the 
Exchange Act or (ii) is dually registered as a broker or dealer 
under Section 15 of the Exchange Act but does not offer services to 
retail investors as a broker-dealer.'' We are not adopting this 
definition because we believe using the term ``investment adviser'' 
is sufficient for the final instructions. See supra footnote 8. 
Furthermore, the final instructions specify that Form CRS applies to 
investment advisers registered under section 203 of the Advisers 
Act.
    \126\ General Instruction 1.C. to Form CRS.
    \127\ General Instruction 1.C. to Form CRS. We discuss 
additional considerations and requirements for dual registrants and 
affiliates in Section II.A.5 below.
    \128\ General Instruction 1.C. to Form CRS.
---------------------------------------------------------------------------

    Many commenters preferred a shorter, one-to-two page document more 
heavily relying on layered disclosure with increased use of hyperlinks 
and other cross-references to more detailed disclosure.\129\ Commenters 
also said that investors are more likely to read a shorter 
document.\130\ Several commenters submitted mock-ups that were shorter 
than four pages.\131\ Others indicated that the length of Form CRS was 
acceptable but should not exceed four pages.\132\ On the other hand, 
certain commenters suggested that the length of the relationship 
summary may be too short to appropriately describe firms' insurance 
services or products.\133\ One commenter said that it would be 
challenging for dual registrants to summarize all of their offerings 
within the four-page limit.\134\ Investor feedback from surveys, 
studies, roundtables, and Feedback Forms also did not show consistent 
results. For example, 57% of the RAND 2018 survey respondents indicated 
that the proposed relationship summary was too long, 41% said it was 
about right, and roughly 2% said it was too short.\135\ In section-by-
section questioning, however, the most common response from RAND 2018 
survey respondents was to keep the section length as is.\136\ 
Similarly, some roundtable participants provided feedback that the 
proposed length was right at the maximum, ``about right,'' or ``good,'' 
\137\ whereas others would have preferred a shorter document.\138\ 
About

[[Page 33506]]

40% of commenters on Feedback Forms said that relationship summary was 
an appropriate length, while about 30% indicated a preference for a 
shorter document.\139\
---------------------------------------------------------------------------

    \129\ See, e.g., Schwab Letter I (``Form CRS should simply be a 
short navigation aid to the existing Form ADV Part 2 disclosure'' 
for investment advisers or ``to additional information readily 
available on the firm's website or enclosed with the account 
documentation'' for broker-dealers.); FSI Letter I (``While we 
support the Commission's efforts to ensure concise disclosure by 
limiting the required Form CRS to four pages (or its electronic 
equivalent), we suggest an even shorter document (perhaps as short 
as one page) with hyperlinks to more detailed disclosures.''); see 
also AARP Letter; Better Markets Letter; Comment Letter of the 
Teachers Insurance and Annuity Association of America (Aug. 7, 2018) 
(``TIAA Letter''); Bank of America Letter; CCMR Letter; LPL 
Financial Letter; Kleimann II, supra footnote 19 (``Form CRS should 
be as short as possible.'').
    \130\ See Fidelity Letter; see also Schwab Letter I (Koski), 
supra footnote 21 (85% of survey participants answered that they 
would be more likely to read disclosure that is short and to the 
point with links to more information; 61% answered that they would 
be less likely to read a document that is longer and more 
comprehensive, but 31% answered that they would be more likely to 
read a longer and more comprehensive disclosure); Comment Letter of 
Glen Strong (Jul. 27, 2018).
    \131\ See, e.g., Schwab Letter I; Fidelity Letter; IAA Letter I.
    \132\ See Cambridge Letter; Comment Letter of Morningstar, Inc. 
(Aug. 7, 2018) (``Morningstar Letter''); Trailhead Consulting 
Letter.
    \133\ See, e.g., ACLI Letter; MassMutual Letter.
    \134\ See Fidelity Letter.
    \135\ RAND 2018, supra footnote 13.
    \136\ RAND 2018, supra footnote 13; see also Cetera Letter II 
(Woelfel), supra footnote 17 (when asked generally how the 
relationship summary could be improved, 10% of survey respondents 
said relationship summary could be shorter).
    \137\ Washington, DC Roundtable, at 18, 26.
    \138\ See Philadelphia Roundtable, at 5, 19 (noting that lengthy 
disclosure ``actually prevents investor interest and really 
understanding more. If something like [the relationship summary] can 
replace the 200 pages and then you have access to the 200 pages if 
you want them, that's a better system'').
    \139\ See Feedback Forms Comment Summary (summary of responses 
to Question 6), supra footnote 11.
---------------------------------------------------------------------------

    In light of commenter and investor feedback, we have determined 
that the relationship summary should be no more than four pages, and 
that in many cases a document shorter than four pages is appropriate. 
As proposed, both standalone firms and dual registrants were subject to 
a four-page limit, even though a dual registrant may have to include 
more disclosures discussing its advisory business and brokerage 
business as compared with standalone firms. Upon further consideration 
of the comments advocating for a more streamlined disclosure that 
includes more white space, we are adopting a four-page limit for dual 
registrants that prepare one combined relationship summary, to permit 
them to capture all of the required information within twice as much 
space as for standalone firms. If dual registrants and affiliated \140\ 
standalone firms choose to prepare separate relationship summaries for 
their brokerage and investment advisory services, each relationship 
summary should not exceed two pages.\141\ The two-page limit will help 
to facilitate comparison of the dual registrant's services, as 
investors can easily review the separate relationship summaries side-
by-side, and will encourage firms to focus on succinctly and clearly 
explaining the required information. Some commenters, including 
providers of insurance products, supported a longer relationship 
summary or expressed concern that four pages would not be enough to 
allow for a summary of all of their offerings.\142\ We believe that the 
elimination of certain sections (such as the comparison section) \143\ 
and most of the prescribed wording from the relationship summary, along 
with the flexibility firms will have under the final instructions to 
describe services with their own wording, and to omit or modify 
required disclosures or conversation starters that are inapplicable to 
their business or specific wording that is inaccurate, should help to 
alleviate the concerns of those who advocated for the relationship 
summary to be longer.
---------------------------------------------------------------------------

    \140\ Form CRS defines an ``affiliate'' as ``Any persons 
directly or indirectly controlling or controlled by you or under 
common control with you.'' General Instruction 11.A. to Form CRS.
    \141\ General Instruction 1.C. to Form CRS (``Dual registrants 
and affiliates that prepare separate relationship summaries are 
limited to two pages for each relationship summary. . . . If 
delivered electronically, the relationship summary must not exceed 
the equivalent of two pages or four pages in paper format, as 
applicable.'').
    \142\ See supra footnotes 133-134 and accompanying text.
    \143\ See infra Section II.B.6 (Proposed Items Omitted in Final 
Instructions).
---------------------------------------------------------------------------

3. Electronic and Graphical Formats, and Layered Disclosure
    We are adding instructions that clarify our support for firms 
wishing to use electronic media in preparing the relationship summary 
for retail investors.\144\ The proposed instructions would have 
permitted firms to add embedded hyperlinks within the relationship 
summary in order to supplement required disclosures \145\ and would 
have required firms to use hyperlinks for any document that is cross-
referenced in any electronic relationship summary.\146\ The proposed 
instructions also permitted firms to use various graphics or text 
features to explain the required information but did not reference 
whether they should be electronic- or paper-based.\147\
---------------------------------------------------------------------------

    \144\ Delivery is discussed in Section II.C. Firms may deliver 
electronic versions of the relationship summary in accordance with 
the final instructions and the Commission's guidance regarding 
electronic delivery. See General Instructions 10.B. through 10.D. to 
Form CRS.
    \145\ Proposed General Instruction 1.(g) to Form CRS (``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.'').
    \146\ Proposed General Instruction 1.(g) to Form CRS (``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.'').
    \147\ Proposed General Instruction 1.(f) to Form CRS (``You may 
use charts, graphs, tables, and other graphics or text features to 
respond 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.'').
---------------------------------------------------------------------------

    Many commenters supported electronic formats, including in 
connection with layered disclosure.\148\ One commenter endorsed 
electronic, including mobile, formats as inherently easier to navigate 
and use in a layered approach and asserted that the relationship 
summary would be more engaging to investors, and thus more effective as 
a disclosure, if the Commission encouraged more creative use of 
electronic formats.\149\ Research submitted by commenters and feedback 
from our investor roundtables indicated that investors preferred a more 
visually appealing disclosure.\150\ Commenters recommended a more 
visually-focused and designed experience, and many mock-ups that 
commenters submitted used graphics and other design features 
extensively.\151\ In addition, the IAC has recommended exploring the 
use of layered disclosure in certain contexts.\152\ The IAC has also 
recommended that the Commission ``continue to explore methods to 
encourage a transition to electronic delivery that respect investor 
preferences and that increase, rather than reduce, the likelihood that 
investors will see and read important disclosure documents.'' \153\ 
Some commenters also expressed support for the IAC's recommendation 
relating to electronic delivery.\154\
---------------------------------------------------------------------------

    \148\ See, e.g., IAA Letter I (``Each key point should be made 
as simply and succinctly as possible, and the investor should then 
be pointed clearly and directly to specific additional plain English 
disclosure explaining the point . . . . This approach would also 
provide firms with the flexibility they need to use innovative 
design and delivery techniques.'').
    \149\ See IAA Letter I.
    \150\ See Betterment Letter I (Hotspex), supra footnote 18 
(reporting study authors' conclusions that survey respondents found 
a version of the standalone adviser relationship summary ``more 
appealing and understandable,'' where Betterment revised the form to 
``[i]mprove visual hierarchy (e.g., layout, shading, shorten and 
standardize paragraph lengths to improve legibility, appeal and 
retention of information''); Schwab Letter I (Koski), supra footnote 
21(79% of survey respondents said they are more likely to read 
disclosure that is ``visually appealing and did not seem like a 
legal document''); Washington, DC Roundtable, at 20; Atlanta 
Roundtable, at 35.
    \151\ See, e.g., CFA Letter I; Fidelity Letter (citing to 
Stanford Law School Design Principles, Use visual design and 
interactive experiences, to transform how you present legal info to 
lay people, available at https://www.legaltechdesign.com/communication-design); Betterment Letter I (mock-up); SIFMA Letter; 
IAA Letter I; Schwab Letter I; see also Kleimann II, supra footnote 
19 (describing design assumptions for a redesigned version of the 
relationship summary).
    \152\ See IAC Broker-Dealer Fiduciary Duty Recommendations, 
supra footnote 10 (in connection with the disclosure of disciplinary 
history, the Commission ``should look at whether it might be 
beneficial to adopt a layered approach to such disclosures, with the 
goal of developing a more abbreviated, user-friendly document for 
distribution to investors'').
    \153\ Investor Advisory Committee, Recommendation of the 
Investor as Purchaser Subcommittee: Promotion of Electronic Delivery 
and Development of a Summary Disclosure Document for Delivery of 
Investment Company Shareholder Reports (Dec. 7, 2017), available at 
https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-promotion-of-electronic-delivery-and-development.pdf 
(``IAC Electronic Delivery Recommendation'').
    \154\ See, e.g., FSI Letter I; Cambridge Letter; Comment Letter 
of the Institute for Portfolio Alternatives (Aug. 7, 2018) 
(``Institute for Portfolio Alternatives Letter'').
---------------------------------------------------------------------------

    Accordingly, we are adopting and adding provisions to the proposed

[[Page 33507]]

instructions to encourage the use of electronic formatting and 
graphical, text, online features and layered disclosures in preparing 
their relationship summaries.\155\ Key elements of the final 
instructions include the following:
---------------------------------------------------------------------------

    \155\ We created a separate section in the instructions focused 
on electronic and graphical formats that includes these 
instructions. 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.'').
---------------------------------------------------------------------------

     The instructions encourage (rather than just permit, as 
proposed) firms to use graphics or text features to respond to the 
required disclosures, or to make comparisons among their offerings, 
including by using charts, graphs, tables, text colors, and graphical 
cues, such as dual-column charts.\156\ If the chart, graph, table, or 
other graphical feature is self-explanatory and responsive to the 
disclosure item, additional narrative language that may be duplicative 
is not required. For a relationship summary provided electronically, 
the instructions further encourage online tools that populate 
information in comparison boxes based on investor selections.\157\
---------------------------------------------------------------------------

    \156\ See General Instruction 3.A. to Form CRS (``You are 
encouraged to use charts, graphs, tables, and other graphics or text 
features to respond to the required disclosures. You are also 
encouraged to use text features, text colors, and graphical cues, 
such as dual-column charts, to compare services, account 
characteristics, investments, fees, and conflicts of interest.'').
    \157\ See General Instruction 3.A. to Form CRS (``For a 
relationship summary that is posted on your website or otherwise 
provided electronically, we encourage online tools that populate 
information in comparison boxes based on investor selections.'').
---------------------------------------------------------------------------

     The instructions reference a non-exhaustive list of 
electronic media, communications, or tools that firms may use in their 
relationship summary.\158\ We are including an instruction that, in a 
relationship summary that is posted on a firm's website or otherwise 
provided electronically, firms must provide a means of facilitating 
access (e.g., hyperlinking) to any information that is referenced in 
the relationship summary if the information is available online.\159\ 
For relationship summaries delivered in paper format, firms may include 
URL addresses, QR codes, or other means of facilitating access to such 
information.\160\ This instruction permits layered disclosure through 
paper disclosures and hybrid paper and electronic deliveries, while 
supporting some investors' preference for paper.
---------------------------------------------------------------------------

    \158\ General Instruction 3.A. to Form CRS (``You also may 
include: (i) A means of facilitating access to video or audio 
messages, or other forms of information (whether by hyperlink, 
website address, Quick Response Code (``QR code''), or other 
equivalent methods or technologies); (ii) mouse-over windows; (iii) 
pop-up boxes; (iv) chat functionality; (v) fee calculators; or (vi) 
other forms of electronic media, communications, or tools designed 
to enhance a retail investor's understanding of the material in the 
relationship summary.'').
    \159\ General Instruction 3.B. to Form CRS. (``In a relationship 
summary that is posted on your website or otherwise provided 
electronically, you must provide a means of facilitating access to 
any information that is referenced in the relationship summary if 
the information is available online, including, for example, 
hyperlinks to fee schedules, conflicts disclosures, the firm's 
narrative brochure required by Part 2A of Form ADV, or other 
regulatory disclosures.'').
    \160\ General Instruction 3.B. to Form CRS. (``In a relationship 
summary that is delivered in paper format, you may include URL 
addresses, QR codes, or other means of facilitating access to such 
information.'').
---------------------------------------------------------------------------

     The instructions provide guidance that firms may include 
instructions on the use and interpretation of interactive graphics or 
tools, as proposed.\161\ We believe that these features can make the 
relationship summary more engaging, accessible, and effective in 
communicating to retail investors.\162\
---------------------------------------------------------------------------

    \161\ General Instruction 3.C. to Form CRS. Instructions that 
firms provide on the use and interpretation of interactive graphics 
or tools would not be subject to the page limitation for 
relationship summaries under General Instruction 1.C to Form CRS, 
but should be succinct, consistent with General Instruction 2.A.
    \162\ Similar to the proposed instructions, the final 
instructions include the caveat that these graphical and text 
features and electronic media, communications, or tools, (i) must be 
responsive to and meet the requirements in these instructions for 
the particular item in which the information is placed; and (ii) may 
not, because of the nature, quantity, or manner of presentation, 
obscure or impede understanding of the information that must be 
included. General Instruction 3.C. to Form CRS. Cf. 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.''). We deleted the reference in the proposed instructions 
to ``is not inaccurate or misleading'' because it is covered by 
another instruction.
---------------------------------------------------------------------------

     The instructions replace the term ``hyperlink'' with the 
more evergreen concept of ``a means of facilitating access,'' which 
will include hyperlinks as well as website addresses, QR Codes, or 
other equivalent methods or technologies.\163\ Expanding the types of 
technology referenced in the instructions will make them more relevant 
as new technologies continue to be developed.
---------------------------------------------------------------------------

    \163\ See, e.g., General Instruction 3.A. to Form CRS (``You 
also may include: (i) A means of facilitating access to video or 
audio messages, or other forms of information (whether by hyperlink, 
website address, Quick Response Code (``QR code''), or other 
equivalent methods or technologies''); General Instruction 3.B. to 
Form CRS (``In a relationship summary that is posted on your website 
or otherwise provided electronically, you must provide a means of 
facilitating access to any information that is referenced in the 
relationship summary if the information is available online, 
including, for example, hyperlinks to fee schedules, conflicts 
disclosures, the firm's narrative brochure required by Part 2A of 
Form ADV, or other regulatory disclosures.).'' Cf. Proposed General 
Instruction 1.(g) to Form CRS (``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.'').
---------------------------------------------------------------------------

    A number of commenters suggested different approaches for whether 
we would treat the relationship summary as ``incorporating by 
reference'' information provided in additional disclosures or materials 
that are hyperlinked to or otherwise accessible from the relationship 
summary.\164\ Some of these commenters suggested that we treat certain 
hyperlinked information as ``incorporated by reference.'' \165\ Other 
commenters recommended that firms should be permitted, but not 
necessarily required, to incorporate in the relationship summary 
additional information provided in other documents.\166\
---------------------------------------------------------------------------

    \164\ See, e.g., Comment Letter of Cetera Financial Group (Aug. 
7, 2018) (``Cetera Letter I''); IRI Letter; Schwab Letter I; Schwab 
Letter III (providing sample Form CRS instructions permitting 
incorporation of materials by reference); Comment Letter of The 
National Society of Compliance Professionals (Aug. 7, 2018) (``NSCP 
Letter''); Schnase Letter; LPL Financial Letter.
    \165\ Schwab Letter I (with respect to broker-dealers, Form CRS 
should navigate investors to additional information readily 
available on the firm's website or enclosed with account 
information, and the additional information would be considered 
incorporated by reference); NSCP Letter (firms should be permitted 
to incorporate by reference public disciplinary disclosure events); 
Schnase Letter (``Firms that follow the SEC rules in filing, posting 
and linking should get the full anti-fraud benefit of the 
information in the Firm Brochure being deemed ``delivered'' when the 
Relationship Summary is delivered, without having to resort to 
arcane and outmoded language and concepts such as ``incorporation by 
reference.'').
    \166\ See Cetera Letter I (suggesting that firms ``should be 
permitted to incorporate other information in Form CRS by reference 
without reproducing the specified information in its' [sic] 
entirety, so long as the location is reasonably accessible to the 
public and the other sources of information are sufficient to meet 
the standards of Form CRS''); IRI Letter (the Commission should 
``permit (but not require) firms to use incorporation by reference 
to satisfy particular components of the disclosures required under 
Regulation Best Interest and/or Form CRS. In other words, if an 
investor already receives a particular piece of information in an 
existing disclosure document (including disclosures required under 
the federal securities laws, SEC or FINRA rules, ERISA, or DOL 
rules) the firm should be permitted to merely reference that 
existing document (with sufficient information for investors to 
locate or obtain that document.'').

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[[Page 33508]]

    As discussed above, we support the use of layered disclosure and 
believe that investors will benefit greatly from receiving a 
relationship summary containing high-level information that they will 
be more likely to read and understand, with the ability to access more 
detailed information. Layered disclosure is an approach that can 
balance the goal of keeping the relationship summary short and 
accessible with the goal of providing retail investors with fulsome and 
specific information. The relationship summary is intended to be a 
self-contained document, however, and firms should be able to meet the 
instructions' requirements by providing generalized and summary 
responses to each item, without relying on incorporation by reference 
to other documents providing additional information. In contrast with 
other disclosure obligations such as prospectuses and registration 
statements, a firm could not satisfy the disclosure requirements set 
forth in the relationship summary instructions by incorporating another 
document (such as the Form ADV Part 2A brochure) by reference.
    At the same time, we recognize the communicative value of layered 
disclosure. The instructions provide, as discussed above, that firms 
may \167\ (and in some cases must) \168\ cross-reference other 
documents and use hyperlinks or other tools to give more details about 
the topic. Where firms link to content outside the relationship summary 
disclosure, whether on a permissive or mandatory basis, the information 
may not substitute for providing any narrative descriptions that the 
instructions require, and the additional information should be 
responsive and relevant to the topic covered by the instruction. Firms 
should be mindful that the antifraud standards under the federal 
securities laws apply to linked information, as with other securities 
law disclosures.
---------------------------------------------------------------------------

    \167\ See, e.g., General Instruction 3.A. to Form CRS (``You 
also may include: (i) A means of facilitating access to video or 
audio messages, or other forms of information (whether by hyperlink, 
website address, Quick Response Code (``QR code''), or other 
equivalent methods or technologies); (ii) mouse-over windows; (iii) 
pop-up boxes; (iv) chat functionality; (v) fee calculators; or (vi) 
other forms of electronic media, communications, or tools designed 
to enhance a retail investor's understanding of the material in the 
relationship summary.'').
    \168\ See, e.g., Item 3.A.(iii) of Form CRS (``You must include 
specific references to more detailed information about your fees and 
costs that, at a minimum, include the same or equivalent information 
to that required by the Form ADV, Part 2A brochure (specifically 
Items 5.A., B., C., and D.) and Regulation Best Interest, as 
applicable.'').
---------------------------------------------------------------------------

    All together we believe encouraging the use of electronic and 
graphical formatting online features, and layered disclosures will 
permit firms to create innovative disclosures that engage investors.
4. Conversation Starters
    Consistent with the proposal, the relationship summary will be 
required to contain suggested follow-up questions for retail investors 
to ask their financial professional. The relationship summary, however, 
will not include a separate section of ``Key Questions to Ask,'' at the 
end of the relationship summary, as proposed. Instead, firms will be 
required to integrate those ``key questions'' for retail investors to 
ask their financial professionals throughout the relationship summary 
as headings to items or as ``conversation starters.''
    The proposed relationship summary would have required firms to 
include ten questions, as applicable to their particular business, 
under the heading ``Key Questions to Ask'' after a statement that the 
retail investors should ask their financial professional the key 
questions about a firm's investment services and accounts.\169\ In 
addition, we proposed to allow firms to include up to four additional 
frequently asked questions.\170\
---------------------------------------------------------------------------

    \169\ See Proposed Item 8 of Form CRS.
    \170\ See id.
---------------------------------------------------------------------------

    Most comment letters that discussed the ``Key Questions to Ask'' 
section generally did not support the proposed approach of including a 
separate section of up to fourteen questions at the end of the 
relationship summary. Commenters who proposed keeping a key questions 
section typically suggested significant substantive or stylistic 
alterations.\171\ In a separate approach, many commenter mock-ups 
included topics and questions from ``Key Questions to Ask'' in a 
question-and-response format throughout the relationship summary.\172\ 
Several commenters suggested that the key questions be removed from the 
relationship summary and placed on the Commission's website with other 
educational materials.\173\
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    \171\ See, e.g., CFA Institute Letter I (suggesting 
interspersing questions through sections of Form CRS rather than 
including at the end); SIFMA Letter (suggesting that firms only be 
required to answer ``four to five'' questions to make the 
communication ``shorter and more meaningful'' to investors).
    \172\ See, e.g., IAA Letter I; Comment Letter of the Institute 
for the Fiduciary Standard (Aug. 6, 2018) (``IFS Letter''); LPL 
Financial Letter; Schwab Letter I.
    \173\ See, e.g., ACLI Letter; IAA Letter I; LPL Financial 
Letter. One commenter representing investors argued that the 
Commission was better-placed to provide information on topics 
covered in the ``Key Questions to Ask'' section because financial 
professionals would have ``room for obfuscation'' in their 
discussions with retail investors. See CFA Letter I.
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    Observations reported in the RAND 2018 report and other surveys and 
studies, and individual investor feedback at roundtables and on 
Feedback Forms generally indicated, that retail investors found the key 
questions helpful, however. In the RAND 2018 survey, the ``Key 
Questions to Ask'' section received the highest support of all sections 
to ``keep as is'' when investors were asked if they would add more 
detail, keep as is, shorten, or delete the section, and a majority of 
RAND 2018 survey respondents also indicated that they were either 
``very comfortable'' or ``somewhat comfortable'' with asking each of 
the key questions.\174\ Surveys and studies submitted by commenters 
also indicated that most investors who reviewed one of the proposed 
sample relationship summaries found the suggested questions to be 
useful and said they were likely to ask the questions.\175\ In 
addition, the ``Key Questions to Ask'' section received the most ``very 
useful'' ratings from commenters who submitted Feedback Forms, and 
narrative comments on several Feedback Forms specifically indicated 
that the questions would encourage discussion with financial 
professionals.\176\ Similarly, investors at

[[Page 33509]]

Commission-held roundtables indicated that they viewed the questions as 
helpful.\177\
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    \174\ See RAND 2018, supra footnote 13. RAND 2018 also reports 
that, in qualitative interviews, ``[m]ost interview participants 
said that they liked all of the questions, that they would ask these 
questions in meeting with a financial service provider, and did not 
suggest dropping any of the questions.''
    \175\ See Betterment Letter I (Hotspex) supra footnote 18 (82% 
of respondents viewing a version of the investment-adviser 
relationship summary found the suggested questions to be very or 
somewhat useful and 93% were very or somewhat likely to ask the 
questions); Cetera Letter II (Woelfel) supra footnote 17 (85% of 
survey participants who viewed the sample dual-registrant 
relationship summary found the key questions to be ``very'' or 
``somewhat'' important to cover, and 84% ``strongly'' or 
``somewhat'' agreed that the key questions described their topics 
clearly); Kleimann I, supra footnote 19 (``Nearly all participants 
saw the Key Questions as essential. They felt the questions were 
straight forward and raised important questions . . . Many said they 
would use the set of questions in their next exchange with their 
broker or adviser.'').
    \176\ See Feedback Forms Comment Summary, supra footnote 11 (51 
commenters (55%) responded to Question 2(g) that the Key Questions 
section was ``very useful'' and 28 (30%) responded that the Key 
Questions section was ``useful''; in comparison, other sections were 
scored as ``very useful'' in the range of 31% to 44%; similarly, 
more than 75% of Feedback Forms included a narrative response to 
Question 7 or other response indicating that the Key Questions were 
useful; 11 narrative responses included specific comments agreeing 
that the Key Questions would encourage discussions with financial 
professionals; and two others stated more generally that the 
relationship summary would encourage dialogue).
    \177\ See, e.g., Atlanta Roundtable (three investors responded 
positively to a question as to whether the key questions were 
helpful, with no dissent to that view); Houston Roundtable (one 
investor responding that ``the questions for me are very, very 
good.'').
---------------------------------------------------------------------------

    In light of comments, we believe that including questions for 
investors to ask their financial professionals is an important 
component of the relationship summary. Several commenter mock-ups 
showed questions throughout the relationship summary grouped by subject 
matter rather than at the end of the document. Investor studies showed 
that proximity and context are important for questions an investor may 
have for a financial professional.\178\ In addition, some commenters' 
Feedback Forms requested that questions be placed earlier in the 
relationship summary document; one specifically suggested that we put 
the questions with ``the appropriate section [with] each section to 
which it applies.'' \179\ We have determined to follow a similar 
approach by replacing the Key Questions to Ask section with specified 
``conversation starters'' throughout the document. We are also using 
some of the proposed questions as topic headings.
---------------------------------------------------------------------------

    \178\ See Kleimann I, supra footnote 19; Kleimann II, supra 
footnote 19 (each recommending question-and-answer format in part to 
place relevant information together).
    \179\ See Feedback Forms Comment Summary, supra footnote 1111 
(summary of responses to Question 7); Hoggan Feedback Form (``Maybe 
you should question at the end of each section--to help frame the 
issue''); see also Hawkins Feedback Form (commenting on obligations 
section that ``[g]iving some examples of types of questions to ask 
would be beneficial'').
---------------------------------------------------------------------------

    There are required questions as conversation starters in each 
section other than the Introduction.\180\ These conversation starters 
are intended to cover the same topics as the proposed key questions and 
in many cases are substantially similar in wording to the proposed key 
questions.\181\ For each conversation starter, firms must use text 
features to make the conversation starters more noticeable and 
prominent in relation to the other discussion text. For example, they 
may use larger or different font; a text box around the heading or 
questions; bolded, italicized, or underlined text; or lines to offset 
the questions from other sections.\182\ We believe the questions will 
be more helpful to investors when included throughout the document with 
formatting highlighting the conversation starters and organizing the 
conversation starters together with the firm's disclosures about a 
particular topic, providing retail investors clearer context for each 
question. However, if a required conversation starter is inapplicable 
to the firm's business, the firm may omit or modify that conversation 
starter.\183\ With these changes, we believe that the conversation 
starters will better help retail investors initiate and engage in 
useful and informative conversations with their investment 
professionals.
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    \180\ See Items 2.D. (relationships and services); 3.A.(iv) and 
3.B.(iii) (fees, costs, conflicts, and standard of conduct); 
4.D.(ii) (disciplinary history); and 5.C. (additional information) 
of Form CRS.
    \181\ For example, the proposed Key Question 6 (``How will you 
choose investments to recommend for my account?'') has been included 
in the final relationship summary as a conversation starter to the 
Relationships and Services section (``How will you choose 
investments to recommend to me?''). For discussion of additional 
conversation starter questions, see infra Section II.A.4 See also 
Proposed Item 8.6 of Form CRS and Item 2.D.(iv) of Form CRS.
    \182\ See General Instruction 4.A. to Form CRS.
    \183\ See General Instruction 2.B. to Form CRS.
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    As proposed, investment advisers that provide only automated 
investment advisory services or broker-dealers that provide services 
only online without a particular individual with whom a retail investor 
can discuss the conversation starters must include a section or page on 
their website that answers each of the conversation starter questions 
and must provide in the relationship summary a means of facilitating 
access (e.g., by providing a hyperlink) to that section or page.\184\ 
For example, a firm could include a hyperlink, QR Code, or some other 
equivalent methods or technologies that would enable a retail investor 
to access that information. One commenter requested clarification that 
all firms could provide retail investors with the answers to each key 
question in writing, and then investors could call a call center for 
follow-up questions.\185\ All firms could choose to provide written 
answers to conversation starters, but the final instructions will only 
require written responses in these limited circumstances to ensure that 
retail investors receive responses when they do not have access to a 
financial professional to ask questions. We continue to believe that 
the requirement as adopted will encourage investor engagement and make 
the conversation starters useful where there is no firm representative 
to answer the question in-person (or by telephone) for the retail 
investor. In addition, as proposed, if the firm provides automated 
investment advisory or brokerage services, but also makes a financial 
professional available to discuss the firm's services with a retail 
investor, the firm must make the financial professional available to 
discuss the conversation starters with the retail investor.\186\
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    \184\ General Instruction 4.B. to Form CRS. As proposed, such 
advisers or broker-dealers would have provided a hyperlink in the 
relationship summary to the appropriate section or page. See 
Proposed Item 8 of Form CRS. In response to comments supporting 
electronic access more broadly, we broadened the instruction to 
allow for other means of facilitating access. We also changed the 
term ``automated advice'' from the proposed instructions to 
``automated investment advisory services'' in the final instructions 
to underscore the ongoing nature of the investment advisory 
relationship.
    \185\ See LPL Financial Letter.
    \186\ General Instruction 4.B. to Form CRS.
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    Six of the proposed key questions will continue to have analogous 
``conversation starter'' questions in the final Form CRS, which we 
discuss in each applicable section below.\187\ These questions cover 
services, fees and costs, conflicts, disciplinary information, and 
information about appropriate contact persons. As described below, we 
revised the wording for all of these questions.
---------------------------------------------------------------------------

    \187\ See infra Sections II.B.2 (relating to Item 2.D. of Form 
CRS), II.B.3.a (relating to Item 3.A.(iv) of Form CRS), II.B.3.b 
(relating to Item 3.B.(iii) of Form CRS); II.B.4 (relating to Item 
4.D.(ii) of Form CRS), and II.B.5 (relating to Item 5.C. of Form 
CRS).
---------------------------------------------------------------------------

    We did not replace four of the key questions with analogous 
``conversation starter'' questions; the topics raised by these key 
questions will be addressed in other ways in the relationship summary. 
First, we have replaced the question requesting financial professionals 
to ``do the math for me'' with a different conversation starter.\188\ 
Commenters raised specific concerns about this question for operational 
and recordkeeping reasons.\189\ We are

[[Page 33510]]

instead requiring that firms include a conversation starter question 
prompting retail investors to ask their financial professional to help 
them understand how the fees and costs might affect their investments 
and the potential impact of fees and costs on a $10,000 
investment.\190\ As we note below, our intent with the proposed ``Do 
the math for me'' question was that it serve as a prompt to encourage 
retail investors to ask about the hypothetical amount they would pay 
per year for an account, what would make the fees more or less, and 
what services they would receive for those fees. The question was not 
intended to require firms to generate individualized cost estimates for 
each particular retail investor. We believe that the newly worded 
conversation starter makes that more clear. Additionally, the required 
discussion of fees, costs, and conflicts, together with the 
conversation starter question, will better serve as an initial basis 
for understanding how fees affect investment returns and the fees that 
they will pay than the ``Do the math for me'' key question.\191\
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    \188\ See Proposed Item 8.2 of Form CRS (``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?'').
    \189\ See, e.g., Comment Letter of Edward D. Jones and Co., L.P. 
(Aug. 7, 2018) (``Edward Jones Letter'') (``[G]iven the range of 
services available, it would be very difficult for financial 
professionals to fully address this question at the outset of the 
[customer] relationship, particularly for investors selecting 
transaction-based services.''); SIFMA Letter (``[M]ost firms do not 
currently have systems in place to allow the financial professionals 
to answer questions such as customer-specific `Do the math for me' 
requests.''); John Hancock Letter (``We further believe that the 
costs and operational hurdles associated with providing personalized 
fee information have been underestimated, and encourage the SEC to 
provide that any ``do the math''-type questions may be answered 
through the use of examples.''). In part to avoid recordkeeping 
requirements on behalf of a financial professional, one commenter 
suggested reframing the questions as reflecting questions back to an 
investor with a prompt to ask the representative for help if the 
investor was unsure as to a response to the questions. See Primerica 
Letter.
     For additional discussion of recordkeeping, see infra Section 
II.E.
    \190\ See Item 3.A.(iv) of Form CRS.
    \191\ See infra Section II.B.3.
---------------------------------------------------------------------------

    Two other proposed key questions regarding costs associated with an 
account and how firms make money \192\ covered information that the 
relationship summary as adopted requires to be disclosed under the 
section on fees, costs, conflicts, and standard of conduct.\193\ 
Specifically, firms must (i) summarize the principal fees and costs 
that retail investors will incur from their services (including how 
frequently they are assessed and the conflicts of interest they create) 
and (ii) describe any other fees related to their brokerage or 
investment advisory services in addition to those principal fees that 
the retail investor will incur.\194\ Additionally, the new conversation 
starter question included in Item 3 is intended to elicit similar 
points of discussion with the following wording: ``Help me understand 
how these fees and costs might affect my investments. If I give you 
$10,000 to invest, how much will go to fees and costs, and how much 
will be invested for me?'' Finally, unlike the proposal, the 
relationship summary must include a description of the ways in which 
the firm and its affiliates make money from brokerage or investment 
advisory services and investments it provides to retail investors as 
well as material conflicts of interest.\195\ As a result of these 
disclosure requirements, the separate questions from the proposal are 
not necessary.
---------------------------------------------------------------------------

    \192\ See Proposed Items 8.3 (``What additional costs should I 
expect in connection with my account?'') and 8.4 (``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?'') of Form CRS.
    \193\ See Item 3 of Form CRS. The Item 3.C. disclosure combined 
with the conversation starter included therein would similarly cover 
information intended to be discussed in response to the fifth 
proposed key question (``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.''). See infra Section II.B.3.b.
    \194\ See Items 3.A.(i) and 3.A.(ii) of Form CRS; see also infra 
Section II.B.3.
    \195\ See Item 3.B.(ii) of Form CRS; see also infra Section 
II.B.3.
---------------------------------------------------------------------------

    Finally, we are not adopting a conversation starter question 
analogous to the proposed key question asking ``How often will you 
monitor my account's performance and offer investment advice?'', 
because the Relationships and Services section of the adopted 
relationship summary requires disclosure about the services and advice 
or recommendations that firms offer and whether or not they monitor 
accounts, including the frequency and any material limitations on any 
such monitoring.\196\
---------------------------------------------------------------------------

    \196\ See Item 2.B.(i) of Form CRS (``Explain whether or not you 
monitor the performance of retail investors' investments, including 
the frequency and any material limitations. Indicate whether or not 
the services described in response to this Item 2.B.(i) are offered 
as part of your standard services.''); see also infra Section 
II.B.2.
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5. Presentation of Relationship Summaries by Dual Registrants and 
Affiliated Firms
    We are modifying the proposed instructions in order to encourage a 
dual registrant to prepare one combined relationship summary discussing 
both its brokerage and advisory services, but a dual registrant will be 
permitted to provide two separate relationship summaries, each 
describing one type of service.\197\ The proposal would have required a 
dual registrant to prepare one relationship summary, presenting most of 
the required items under standardized headings and in a tabular format, 
with brokerage services described in one column and advisory services 
described in another.\198\ We also are adding a new instruction 
permitting affiliates to prepare a single relationship summary 
describing both brokerage and investment advisory services that they 
offer or to prepare separate relationship summaries, one for each type 
of service.\199\ In comparison, the proposed instructions did not 
permit affiliates to deliver one combined relationship summary, but did 
allow them to state that they offer retail investors their affiliates' 
brokerage or advisory services, as applicable.\200\
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    \197\ General Instruction 5.A. to Form CRS.
    \198\ Proposed General Instruction 1.(e) to Form CRS.
    \199\ General Instruction 5.B. to Form CRS.
    \200\ Proposed Item 2.D. of Form CRS. This disclosure only 
applied in the context of an affiliate of the firm. This item was 
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. Cf. Comment 
Letter of Northwestern Mutual Life Insurance Company (Aug. 7, 2018) 
(``Northwestern Mutual Letter'') (interpreting Proposed Item 3 to 
prohibit the mention of affiliate services).
---------------------------------------------------------------------------

    We are not adopting the definitions of ``standalone broker-dealer'' 
and ``standalone investment adviser'' as proposed, because they are no 
longer necessary given the streamlining of the instructions relative to 
the proposal.\201\ Under the final instructions, however, we are 
defining a dual registrant as ``[a] firm that is dually registered as a 
broker-dealer under section 15 of the Exchange Act and an investment 
adviser under section 203 of the Advisers Act and offers services to 
retail investors as both a broker-dealer and an investment adviser'', 
substantially as proposed. To clarify, a firm that is dually registered 
as both a broker-dealer and an investment adviser but does not offer 
both brokerage and investment advisory services to retail investors 
would not fall within the definition of dual registrant. For example, a 
firm that is dually registered and offers investment advisory services 
to retail investors, but offers brokerage services only to 
institutional customers, would be required to prepare, file, and 
deliver the relationship summary only in accordance with the 
obligations of an investment adviser offering services to retail 
investors.\202\
---------------------------------------------------------------------------

    \201\ See supra footnote 8.
    \202\ See also Advisers Act Rule 204-5; Exchange Act Rule 17a-
14(a); General Instructions to Form CRS (``If you do not have any 
retail investors to whom you must deliver a relationship summary, 
you are not required to prepare or file one.''); General Instruction 
11.C to Form CRS.
---------------------------------------------------------------------------

    Dual Registrants. Investor studies and surveys showed mixed results 
in connection with the dual-column, combined relationship summary. For 
example, when presented with screen shots of each separate section in 
dual-column format, 85% of RAND 2018 survey respondents indicated that 
the side-by-side comparison format helped them decide whether a broker-
dealer or investment adviser account would be right for them, but 
during qualitative interviews, some participants had difficulty with 
the two column

[[Page 33511]]

format.\203\ On Feedback Forms, some indicated that they liked the 
side-by-side or grid presentation.\204\ One Feedback Form commenter 
said the dual-column format was confusing, however.\205\ An interview-
based study also indicated that both the formatting and the language in 
the dual-column format in our proposed sample relationship summary 
contributed to investor confusion about differences between broker-
dealers' and investment advisers' services.\206\ Both industry 
representatives and commenters representing investors also expressed 
concerns about the proposed formatting requirements for dual 
registrants' relationship summaries.\207\ Two commenters supported 
using visual formatting to help investors understand the options dual 
registrants provide, but argued that the proposed content or design 
should be changed.\208\
---------------------------------------------------------------------------

    \203\ See RAND 2018, supra footnote 13, at 22; see also id., at 
46 (``Some participants grasped that the document was organized into 
two columns, each corresponding to an account type. Some others did 
not realize this immediately but grasped it once it was pointed out 
by an interviewer.'').
    \204\ See, e.g., Anonymous03 Feedback Form (``a side by side 
chart with u's [sic] to say which type of account offers which 
service''); Anonymous14 Feedback Form (``recommend chart 
structure''); Anonymous28 (``Presenting the differences in parallel 
columns gives the best chance for people new ot [sic] investing to 
understand what is involved''); Baker Feedback Form (``the double 
column format, comparing the two classes, was clear and easy to 
follow''); and Smith1 Feedback Form (``I like the side by side 
comparisons'').
    \205\ See Anonymous02 Feedback Form (``Maybe a bit hard to read 
the columns.'').
    \206\ See Kleimann I, supra footnote 19, at 30-31 (``Most 
participants tried to read the CRS by looking first at one column, 
usually the Broker Dealer Services, and then at the second column . 
. . when they turned to the second column they then tried to match 
the bullets . . . . Sometimes this matching was relatively easy to 
do, as in the Types of Relationships and Services section because 
the bullets aligned almost exactly. They struggled and found the 
misaligned bullets confusing in subsequent sections . . . Some 
participants simply took information from the first bullet they read 
or from bolded words or phrases.'').
    \207\ See AARP Letter; CFA Letter I; TIAA Letter; Fidelity 
Letter; MassMutual Letter; LPL Financial Letter; SIFMA Letter; 
Comment Letter of BlackRock, Inc. (Aug. 7, 2018) (``BlackRock 
Letter'') (expressing concern that investors may be confused if dual 
registrants were required to disclose all of their advisory and 
brokerage services in a single relationship summary); see also 
Schwab Letter II (``Dual-registrant firms recommend flexibility 
because of real-world concerns that the side-by-side comparison will 
not be effective.'').
    \208\ See AARP Letter (``[a]lthough the visual formatting is 
helpful, the substantive information laid out within the table 
remains technical and is likely to be confusing to the average 
retail investor''); CFA Letter I (emphasizing that investors must 
see all available options in order to make an informed decision, and 
that the Commission consult with disclosure design experts toward 
developing a form that is most likely to result in informed investor 
choice.'').
---------------------------------------------------------------------------

    Several commenters suggested letting dual registrants choose 
whether to prepare one combined relationship summary or two separate 
ones.\209\ Commenters argued that providing information about both 
brokerage and investment advisory services as proposed would confuse 
investors.\210\ Another suggested requiring dual registrants to prepare 
and deliver different relationship summaries to retail investors 
depending on whether the investors enter into an advisory or brokerage 
relationship, and to highlight the availability and link to the 
relationship summary of the other type of service.\211\ One commenter 
argued that dual registrants needed flexibility to maintain two 
separate disclosures to allow each financial professional associated 
with the dual registrant to provide a tailored disclosure to his/her 
customer, without including services that he/she is not licensed to 
provide.\212\
---------------------------------------------------------------------------

    \209\ See Schwab Letter III (providing sample Form CRS 
instructions that permit dual registrants either to prepare a 
single, comparative relationship summary, or two separate 
relationship summaries describing each type of service and providing 
links to each other); TIAA Letter; Fidelity Letter; MassMutual 
Letter; LPL Financial Letter; SIFMA Letter; BlackRock Letter.
    \210\ See, e.g., TIAA Letter (a combined relationship summary 
would confuse customers of dually registered firms that provide only 
one type of service and would overwhelm them with information not 
relevant to the relationship); LPL Financial Letter; SIFMA Letter; 
BlackRock Letter.
    \211\ See IAA Letter I.
    \212\ See MassMutual Letter.
---------------------------------------------------------------------------

    We encourage dual registrants to prepare a single disclosure, 
designed in a manner that facilitates comparison between their 
brokerage and advisory services. Informed by comments, we have 
determined that two separate disclosures might be appropriate, 
depending on the different ways firms and their financial professionals 
offer services and on the particular facts and circumstances. For 
example, financial professionals with licenses to offer services as a 
representative of a broker-dealer and investment adviser may offer 
services through a dual registrant, affiliated firms, or unaffiliated 
firms, or only offer one type of service notwithstanding their dual 
licensing.\213\ Financial professionals who are not dually licensed may 
offer one type of service through a firm that is dually registered. 
Accordingly, the final instructions permit dual registrants and 
affiliates to prepare a single relationship summary, or alternatively, 
two separate ones, to describe their brokerage and investment advisory 
services in a way that accurately reflects their business models and 
will be the most helpful to retail investors. The instructions 
explicitly encourage preparation of a single relationship summary, 
however, given that a number of investors and commenters reacted 
positively to this presentation.\214\
---------------------------------------------------------------------------

    \213\ See, e.g., LPL Financial Letter.
    \214\ See, e.g., RAND 2018, supra footnote 13 (reporting that 
85% of survey respondents found the side-by-side comparison format 
to be helpful for purposes of deciding between a broker-dealer and 
investment adviser); see also CFA Letter I (stating it supported 
using one document to provide comparing brokerage and investment 
advisory services); Fidelity Letter (stating that a single Form CRS 
for a dual-registered firm could accomplish its objective); Schnase 
Letter (supporting the idea of having a unique form for dual 
registrants).
---------------------------------------------------------------------------

    A firm preparing a single relationship summary will be required to 
employ design elements of its own choosing to promote comparability; 
however, we are not prescribing the two-column format, as proposed. We 
agree that making retail investors aware of a range of options is 
important to help them make an informed choice,\215\ but we recognize 
the potential limits of a tabular format, as illustrated by results 
from some investor studies and surveys,\216\ and we have concluded that 
firms are generally in a better position than the Commission to 
determine a format and design that facilitates comparison of their 
specific brokerage and investment advisory services. Whether a firm 
prepares a single relationship summary or two separate ones, the final 
instructions require a firm to present the information with equal 
prominence and in a manner that clearly distinguishes and facilitates 
comparison of the two types of services.\217\ For example, a firm could 
use a tabular format; text features such as text boxes; bolded, 
italicized, or underlined text; or lines to clearly indicate 
similarities and differences in its services.
---------------------------------------------------------------------------

    \215\ See supra footnote 208 and accompanying text; infra 
footnote 1046 and accompanying text (discussing studies concerning 
the availability and presentation of comparative information on 
decision making).
    \216\ See supra footnotes 203-206 and accompanying text.
    \217\ General Instruction 5.A. to Form CRS.
---------------------------------------------------------------------------

    While we are providing this flexibility, we believe investors 
should see a range of options. Accordingly, the final instructions 
provide that a firm preparing two separate relationship summaries must 
provide a means of facilitating access to each relationship summary 
(e.g., include cross-references or hyperlinks) and deliver both with 
equal prominence and at the same time to each retail investor, whether 
or not that retail investor qualifies for those retail services or 
accounts.\218\ We disagree with commenters suggesting that dual 
registrants should have the option to deliver to retail investors a 
relationship summary describing only one type of service if, for 
example, that

[[Page 33512]]

investor does not qualify for one of the services.\219\ Retail 
investors should be able to learn about and compare the range of 
options a firm offers to retail investors, even if the financial 
professional does not believe that the retail investor meets the 
requirements for or is considering certain services at that time. For 
example, a retail investor may initially seek ongoing advice through an 
advisory account, but after learning about both brokerage and advisory 
services and speaking with a financial professional, may decide that a 
brokerage account is a better choice. Or a retail investor may not 
qualify for certain accounts at the time of receiving the relationship 
summary, e.g., by not being able to meet an account opening minimum, 
but may qualify for them in the future, or may qualify for a particular 
service at one firm but not another. Furthermore, a retail investor may 
initially make the financial professional aware of only certain asset 
holdings (for example, he or she approaches a firm to rollover an IRA). 
On that basis, the firm may believe the investor only qualifies for 
certain of the firm's services. However, the investor may also have 
substantial other asset holdings and thus qualify for a variety of 
accounts that the firm offers. Knowing about the alternative brokerage 
and investment advisory options that a firm offers will help retail 
investors to compare firms' offerings and consider whether to adjust 
the relationship or services as investors' financial circumstances 
change.
---------------------------------------------------------------------------

    \218\ General Instruction 5.A. to Form CRS.
    \219\ See IAA Letter I; Fidelity Letter.
---------------------------------------------------------------------------

    Affiliate Services. As discussed above, the proposed instructions 
did not permit affiliates to prepare a combined relationship summary, 
but did permit firms with affiliates offering retail investors 
brokerage or advisory services to disclose these services.\220\ Several 
commenters recommended that affiliates should have the same flexibility 
to prepare one or two relationship summaries as dual registrants.\221\ 
We agree that this flexibility is appropriate for affiliates and are 
modifying the instructions to permit, but not require, delivery of a 
single relationship summary. Affiliates preparing a single relationship 
summary will provide the same comparative benefits for investors as 
dual registrants doing so. As with dual registrants, some affiliated 
firms market their services together and have financial professionals 
who hold licenses through each firm. We recognize, however, that not 
all affiliates operate in the same way. Some affiliated firms operate 
independently, do not market their services together, and do not share 
financial professionals. The different ways in which financial 
professionals affiliate with firms to provide services also warrant 
this flexibility. For example, some commenters noted that many 
financial professionals are licensed representatives of a brokerage 
firm and are also licensed through an affiliated investment advisory 
firm or an unaffiliated investment advisory firm (sometimes as a sole 
proprietor) separately registered with the Commission or one or more 
States.\222\ Depending on the relationship among affiliates and their 
financial professionals, a single relationship summary or two separate 
summaries may be more appropriate.\223\
---------------------------------------------------------------------------

    \220\ Proposed Item 2.D. of Form CRS.
    \221\ See Fidelity Letter; LPL Financial Letter (``[D]ual-hatted 
financial professionals may either (i) provide brokerage and 
advisory services on behalf of LPL or (ii) provide brokerage 
services on behalf of LPL while providing advisory services on 
behalf of an unaffiliated RIA that is separately registered . . . . 
[In the latter case, an investor] would receive a dual registrant 
relationship summary from LPL and a standalone investment adviser 
relationship summary from the RIA'' without knowing which entity 
would be providing advisory services.''). Other commenters suggested 
that the instructions clarify whether the requirements for dual 
registrants apply to affiliated broker-dealers and investment 
advisers. Comment Letter of State Farm Mutual Automobile Insurance 
Company (Aug. 6, 2018) (``State Farm Letter'') (``[T]he SEC did not 
provide a template or otherwise discuss whether affiliated broker-
dealers and investment advisers can use blended or combined Form 
CRS''); Cambridge Letter (requesting that the Commission clarify 
that all references to dual registrants are applicable to broker-
dealers and registered investment advisers organized under a single 
corporate structure as affiliated entities).
    \222\ See, e.g., LPL Financial Letter.
    \223\ One commenter described arrangements in which a dual-
hatted financial professional may provide brokerage services on 
behalf of a dual registrant and advisory services on behalf of an 
unaffiliated investment adviser. The commenter expressed concern 
that an investor may be confused if the dual registrant's and 
unaffiliated investment adviser's relationship summaries both 
describe investment advisory services. See LPL Financial Letter. We 
believe the flexibility for dual registrants and affiliated firms to 
prepare combined or separate relationship summaries under the final 
instructions should address this concern, and firms can determine 
which presentations are most helpful for investors.
---------------------------------------------------------------------------

    Many dually licensed financial professionals offer services on 
behalf of two affiliates, similar to dually licensed financial 
professionals offering services for a dual registrant. One commenter 
requested that the Commission provide clarity that all references to 
dual registrants apply to broker-dealers and investment advisers 
organized under a single corporate structure as affiliated 
entities.\224\ Consistent with our discussion above, we believe that 
retail investors seeking services from dually licensed financial 
professionals should receive information about all of the services the 
financial professional offers, even if the services are through two 
affiliated SEC-registered firms. As a result, if two affiliated SEC-
registered firms prepare separate relationship summaries, and they 
provide brokerage and investment advisory services through dually 
licensed financial professionals, the final instructions require the 
firms to deliver to each retail investor both firms' relationship 
summaries with equal prominence and at the same time, without regard to 
whether the particular retail investor qualifies for those retail 
services or accounts. To provide clarity, we have added a definition 
for dually licensed professionals in the final instructions that was 
not included in the proposal.\225\ The final instructions also provide 
that each of the relationship summaries must cross-reference and link 
to the other.\226\ If the affiliated firms are not providing brokerage 
and investment advisory services through dually licensed financial 
professionals, they may choose whether or not to reference each other's 
relationship summary and whether or not to deliver the affiliate's 
relationship summary with equal prominence and at the same time.\227\
---------------------------------------------------------------------------

    \224\ See Cambridge Letter.
    \225\ General Instruction 11.B. to Form CRS (defining ``dually 
licensed financial professional'' as ``A natural person who is both 
an associated person of a broker or dealer registered under section 
15 of the Exchange Act, as defined in section 3(a)(18) of the 
Exchange Act, and a supervised person of an investment adviser 
registered under section 203 of the Advisers Act, as defined in 
section 202(a)(25) of the Advisers Act.'').
    \226\ General Instruction 5.B. to Form CRS. As discussed above, 
as is the case for dual registrants, affiliates preparing separate 
relationship summaries must deliver them to each retail investor 
with equal prominence and at the same time, without regard to 
whether the particular retail investor qualifies for those retail 
services or accounts. Each of the relationship summaries must 
reference and provide a means of facilitating access to the other. 
General Instruction 5.B.(ii).a. to Form CRS.
    \227\ General Instruction 5.B.(ii).b. to Form CRS. Firms that 
are unaffiliated will be treated as standalone broker-dealers and 
standalone investment advisers, each with an independent 
responsibility to create and deliver its own relationship summary in 
accordance with the final instructions.
---------------------------------------------------------------------------

    Finally, we modified the instructions to explicitly permit a firm 
to acknowledge other financial services the firm provides in addition 
to its services as a broker-dealer or investment adviser registered 
with the SEC, such as insurance, banking, or retirement services, or 
investment advice pursuant to state registration or licensing.\228\

[[Page 33513]]

Firms may include a means of facilitating access (e.g., cross-
references or hyperlinks) to additional information about those 
services.\229\ Some commenters encouraged the SEC to allow firms to 
disclose services of other affiliates, even if those services are not 
regulated by the SEC, such as investment advisory services offered by 
an affiliated thrift savings institution.\230\ In response to our 
request for comment asking whether we should permit firms to include 
wording regarding other types of services and lines of businesses, 
several commenters submitting mock-ups of relationship summaries 
included language referencing banking and insurance services or 
products.\231\ We found these comments persuasive and believe that 
permitting firms to reference financial services not necessarily 
regulated by the Commission so that retail investors can see the range 
of options available to them can benefit their decision-making, as 
discussed above.\232\ This new instruction supports and expands upon 
the commenters' suggestions. Given that the focus of the relationship 
summary is on brokerage and/or advisory services, however, information 
pertaining to other services should not obscure or impede understanding 
of the information that must be disclosed in accordance with the Form 
CRS instructions.\233\
---------------------------------------------------------------------------

    \228\ General Instruction 5.C. to Form CRS. This would also 
permit a broker-dealer that is registered with one or more states as 
an investment adviser to refer to such advisory services.
    \229\ General Instruction 5.C. to Form CRS.
    \230\ See Northwestern Mutual Letter (seeking flexibility to 
disclose advisory services offered through an affiliated thrift 
because this would be in the clients' best interest); ACLI Letter 
(asserting that Form CRS is not flexible enough to describe in a 
meaningful and accurate way investment advisory services provided by 
insurance affiliates such as banks or thrifts).
    \231\ See ASA Letter; Primerica Letter; Comment Letter of Stifel 
Financial (Aug. 7, 2018) (``Stifel Letter'') (referencing bank sweep 
accounts and also providing: ``Banks and insurance brokers and 
agents may also provide access to financial planning and advice 
services, but these services are beyond the scope of this 
document.''); Cetera Letter I (referencing bank sweep programs).
    \232\ See supra footnotes 215, 218-219, and accompanying text.
    \233\ See General Instruction 5.C. to Form CRS.
---------------------------------------------------------------------------

    We believe that, together, these requirements for dually registered 
firms, financial professionals, and affiliates will enhance 
comparability while providing flexibility for them to present their 
services and relationships in the way the firm believes to be the 
clearest.

B. Items

    The relationship summary is principally designed to provide 
succinct information about (i) relationships and services the firm 
offers to retail investors; (ii) fees and costs that retail investors 
will pay, conflicts of interest, and the applicable standard of 
conduct; and (iii) disciplinary history. The proposed relationship 
summary included this information as well as additional topics that we 
are eliminating, as explained further below. In determining the scope 
of the relationship summary, we balanced the need for robust 
disclosures with the risk of ``information overload'' and reader 
disengagement, a theme in comment letters, investor feedback at 
roundtables and in the Feedback Forms, and observations reported in the 
RAND 2018 report and other surveys and studies.
    Some of the key changes from the proposal include:
     We have modified the sections to place substantively 
related information generally together. We believe this will facilitate 
comprehension, leading to a better-informed decision-making process and 
selection of a firm, financial professional, account type, services, 
and investments.
     The final instructions simplify the introduction; 
highlight disciplinary history in a separate section; and integrate key 
questions, now characterized as ``conversation starters,'' among the 
remaining sections of the relationship summary.
     After reviewing the comments and observations reported in 
the RAND 2018 report and other surveys and studies, we have determined 
to remove prescribed generalized comparisons between brokerage and 
investment advisory services.
1. Introduction
    The relationship summary will include a standardized introductory 
paragraph. The instructions will require a firm to: (i) State the name 
of the broker-dealer or investment adviser and whether the firm is 
registered with the Securities and Exchange Commission as a broker-
dealer, investment adviser, or both; (ii) indicate that brokerage and 
investment advisory services and fees differ and that it is important 
for the retail investor to understand the differences; and (iii) state 
that free and simple tools are available to research firms and 
financial professionals at the Commission's investor education website, 
Investor.gov/CRS, which also provides educational materials about 
broker-dealers, investment advisers, and investing.\234\
---------------------------------------------------------------------------

    \234\ See Item 1 of Form CRS. Firms also must include the date 
prominently at the beginning of the relationship summary, for 
example, in the header or footer of the first page or in a similar 
location for a relationship summary provided electronically. See id.
---------------------------------------------------------------------------

    The introduction's instructions as adopted differ from the 
proposal, which would have required prescribed wording in the 
introduction that differed for broker-dealers, investment advisers, and 
dual registrants. Specifically, the prescribed wording in the proposed 
introduction was intended to highlight in a generalized sense and make 
investors aware that broker-dealers and investment advisers are 
different, and that investors needed to carefully consider this choice. 
We received one comment specifically addressing the introduction. It 
stated that the prescribed wording would not capture the attention of 
retail investors and failed to adequately convey information regarding 
differences between investment advisers and broker-dealers.\235\ In 
addition, several of the mock-ups commenters submitted included other 
suggestions for beginning the relationship summary, many of which had 
an introduction that was generally shorter and included less discussion 
about generalized business models than the proposed relationship 
summary.\236\ In response to the comment and the mock-ups, a number of 
which we found conveyed useful information in a more concise manner 
than the proposed prescribed wording, we simplified and standardized 
the introductory paragraph, eliminating or replacing most of the 
prescribed wording we proposed, as discussed further below. In 
addition, we added a requirement to provide a link to Investor.gov/CRS 
in the Introduction to highlight the tools and educational resources 
available to retail investors. This dedicated page on Investor.gov will 
provide information specifically tailored to educate retail investors 
about financial professionals, including search tools in order to 
research firms and financial professionals and information about 
broker-dealers and investment advisers and their different services, 
fees, and conflicts. We believe the changes and the new page will 
better focus retail investors on how the relationship summary can be 
most helpful to them, while providing a link to resources to more 
general investor education information at the front of the relationship 
summary.
---------------------------------------------------------------------------

    \235\ See CFA Letter I. The commenter argued that the 
introduction would best be used to convey additional basic 
information about the differences between services offered by 
broker-dealers, investment advisers, and dual registrants. See id.
    \236\ See, e.g., Primerica Letter; Schwab Letter I; SIFMA 
Letter.
---------------------------------------------------------------------------

    We made the following specific changes to the introduction: First, 
the final instructions require all firms to include certain information 
without prescribing the specific words that firms

[[Page 33514]]

must use.\237\ The proposed relationship summary would have required 
prescribed wording that differed for standalone investment advisers, 
standalone broker-dealers, and dual registrants.\238\ These changes 
correspond with the general approach throughout the final instructions 
of permitting more flexibility for firms to tailor the wording of their 
relationship summaries to enhance the relationship summary's accuracy, 
clarity, usability, and design.\239\
---------------------------------------------------------------------------

    \237\ See Item 1 of Form CRS.
    \238\ See Proposed Items 1.B. (standalone broker-dealers); 1.C. 
(standalone investment advisers); and 1.D. (dual registrants) of 
Form CRS.
    \239\ See supra footnote 83 and accompanying text.
---------------------------------------------------------------------------

    Second, we eliminated the proposed requirement that standalone 
investment advisers state that they do not provide brokerage services, 
and vice versa.\240\ We believe this information is more succinctly 
conveyed by including the firm's registration status.\241\ 
Additionally, commenters pointed out that the choice of financial 
services providers is not binary--there are more than two types of 
services offered that could apply.\242\ We agree that the proposed 
wording could be viewed as unduly constricting and potentially 
misleading.
---------------------------------------------------------------------------

    \240\ In bold font, a standalone broker-dealer would have been 
required to state: ``We are a broker-dealer and provide brokerage 
accounts and services rather than advisory accounts and services.'' 
Proposed Item 1.B. of Form CRS. Likewise, a standalone investment 
adviser would have been required to state in bold font: ``We are an 
investment adviser and provide advisory accounts and services rather 
than brokerage accounts and services.'' Proposed Item 1.C. of Form 
CRS. Dual registrants would have included a similar statement in 
bold font: ``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.'' Proposed Item 1.D. of 
Form CRS.
    \241\ As noted and discussed further infra, the Introduction 
will also refer retail investors to Investor.gov/CRS for further 
information regarding broker-dealers and investment advisers.
    \242\ See, e.g., ACLI Letter (describing the ``binary approach 
that the SEC has taken, which is not entirely accurate for the 
distribution of variable annuity and variable life products'').
---------------------------------------------------------------------------

    Third, we excluded the statement for dual registrants that, 
depending on an investor's needs and investment objectives, the firm 
can provide services in a brokerage account, investment advisory 
account, or both at the same time. We believe that this information is 
conveyed more effectively by the statement of a firm's registration 
status and the information provided elsewhere in the relationship 
summary, such as in the description of services that the firm 
provides.\243\ In addition, requiring a statement of a firm's 
registration status at the beginning of the relationship summary helps 
obviate a need for the Affirmative Disclosures under the Exchange Act 
and the Advisers Act proposed specifically to require a broker-dealer 
and an investment adviser to prominently disclose that it is registered 
as a broker-dealer or investment adviser, as applicable, with the 
Commission in print or electronic retail investor communications.\244\ 
As discussed below, we are not adopting the Affirmative 
Disclosures.\245\ In response to our request for comment relating to 
the Affirmative Disclosures,\246\ several commenters stated that the 
proposed rules were duplicative of other disclosure obligations (e.g., 
Form ADV, Regulation Best Interest, Form CRS) \247\ and that such rules 
were costly and difficult to implement and supervise.\248\
---------------------------------------------------------------------------

    \243\ See infra Section II.B.2.
    \244\ See Proposing Release, supra footnote 5, at Section III.D.
    \245\ See infra Section III.
    \246\ See Proposing Release, supra footnote 5, at Section III.D.
    \247\ See, e.g., LPL Financial Letter; SIFMA Letter; IRI Letter; 
Committee of Annuity Insurers Letter; Trailhead Consulting Letter; 
see also infra Section III.
    \248\ See, e.g., LPL Financial Letter; Bank of America Letter; 
IRI Letter; SIFMA Letter; Comment Letter of Altruist Financial 
Advisors LLC (Aug. 7, 2018) (``Altruist Letter''); see also infra 
Section III.
---------------------------------------------------------------------------

    Fourth, we have included an instruction that allows (but does not 
require) reference to FINRA or Securities Investor Protection 
Corporation (``SIPC'') membership in a manner consistent with other 
rules and regulations (e.g., FINRA rule 2210).\249\
---------------------------------------------------------------------------

    \249\ See Item 1.A. of Form CRS.
---------------------------------------------------------------------------

    We are not adopting the proposed requirements to include statements 
that: (i) There are different ways an investor can get help with 
investments; (ii) an investor should carefully consider which types of 
accounts and services are right for him or her; (iii) the relationship 
summary gives an investor a summary of the types of services the firm 
provides and how the investor pays; and (iv) an investor should ask for 
more information with a specific reference to the key questions.\250\ 
We believe that this information is not necessary in the introduction 
and is better conveyed through the revised question-and-answer 
structure of the relationship summary and a more streamlined 
introduction highlighting that it is important for retail investors to 
understand the difference between brokerage and investment advisory 
services and fees and referencing Investor.gov/CRS.\251\ The 
conversation starters more directly prompt discussion between retail 
investors and their investment professionals than a generalized 
statement to ask for more information, and the conversation starters 
relating to the Relationships and Services item convey that an investor 
should carefully consider which types of accounts and services are 
appropriate. In addition, several commenter mock-ups demonstrated that 
removing the prescribed wording from each of these changes results in a 
shorter introduction and promotes additional white space in the 
relationship summary. Our adopted instructions remove required text 
that might be unnecessary for investors, similar to introductions in 
mock-ups that were typically shorter with less discussion about 
generalized business models than the proposed relationship 
summary.\252\ As a result, we believe these changes will enhance the 
relationship summary's clarity, usability, and design.
---------------------------------------------------------------------------

    \250\ See Proposed Items 1.B. (standalone broker-dealers); 1.C. 
(standalone investment advisers); and 1.D. (dual registrants) of 
Form CRS.
    \251\ Similarly, we eliminated the reference to suggested 
questions on a specified page because the key questions are now 
included throughout the relationship summary.
    \252\ See, e.g., Primerica Letter; Schwab Letter I; SIFMA 
Letter.
---------------------------------------------------------------------------

    Finally, we added a requirement to provide a link to Investor.gov/ 
CRS and state that free and simple search tools are available at 
Investor.gov/CRS in order to research firms and financial 
professionals. Firms also will state that the page provides educational 
materials about broker-dealers, investment advisers, and investing. 
These materials include information about the different services and 
fees that broker-dealers and investment advisers offer. We believe a 
focus on Investor.gov and specifically the Investor.gov/CRS page at the 
beginning of the relationship summary will be more helpful to retail 
investors than the proposed relationship summary introduction. 
Investor.gov provides various resources that can assist with investor 
education relating to firms and their professionals. Among other 
components, Investor.gov currently provides resources prepared by 
Commission staff for retail investors to:
     Review the background of their investment professional;
     Educate themselves about investment products, including 
the risks and unique characteristics of many products;
     Perform fee calculations;
     Review Investor Alerts and Bulletins;
     Find contact information for the Commission; and

[[Page 33515]]

     Review educational information regarding broker-dealers 
and investment advisers.\253\
---------------------------------------------------------------------------

    \253\ See Investor Bulletin: Ten Ways to Use Investor.gov (Mar. 
8, 2017), available at https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-ten-ways-use-investorgov; see also Brokers, available at https://www.investor.gov/research-before-you-invest/methods-investing/working-investment-professional/brokers; Investment Advisers, 
available at https://www.investor.gov/research-before-you-invest/methods-investing/working-investment-professional/investment-advisers.
_____________________________________-

    The Investor.gov/CRS page will bring together these types of 
educational materials about investment professionals, along with 
broader tools and other content specifically tailored for retail 
investors on Investor.gov, which will help them to more easily learn 
about different types of firms and find information about specific 
firms and financial professionals.
    As discussed further below, we are removing discussions in the 
proposed relationship summary that were more generalized or educational 
in nature, including the comparison sections for standalone broker-
dealers and investment advisers and other statements comparing these 
two different types of financial services and fees. Many commenters 
indicated that the Commission is generally better-positioned to provide 
investor education materials as compared to firms.\254\ As a result, 
the revised introduction provides the Investor.gov/CRS link at the 
beginning of the relationship summary to direct retail investors to the 
Commission staff's resources and highlights the importance of investor 
education.\255\
---------------------------------------------------------------------------

    \254\ See supra footnote 40 and accompanying text.
    \255\ Certain commenters provided mock-ups that did not include 
any introductory wording. E.g., Fidelity Letter; IAA Letter I. In 
our view, these mock-ups either did not include, or, at minimum, did 
not appropriately highlight, important information regarding the 
registration status of the firm or the availability of additional 
information for retail investors.
---------------------------------------------------------------------------

    Investors and commenters also supported highlighting Investor.gov 
more generally. Investor feedback at roundtables generally indicated 
that Investor.gov was a useful website for retail investors and should 
be prominent in the relationship summary.\256\ Comment letters were 
supportive of the Commission providing educational materials to retail 
investors generally and Investor.gov specifically.\257\ Observations in 
surveys and studies also indicated that many retail investors would 
seek information at Investor.gov and would trust that information 
because it is a government site.\258\ Some investor studies, however, 
indicated that retail investors did not understand what information was 
available at Investor.gov.\259\ Moving the link to Investor.gov/CRS and 
the related explanation to the front of the relationship summary (from 
the ``Additional Information'' section at the end of the relationship 
summary, as proposed) will address this issue by making the website 
more prominent and by concentrating information helpful to retail 
investors on one dedicated page on Investor.gov.
---------------------------------------------------------------------------

    \256\ See Denver Roundtable (Investor Nine: ``Yeah, I went there 
[to Investor.gov], that's good.'' Ms. Siethoff: ``Did you think that 
sort of thing should be highlighted more?'' Investor Nine: ``More, 
yes. More''); Philadelphia Roundtable (Investor Four: ``I went to 
those websites [including Investor.gov] and I found them very 
useful.''). Some Feedback Form commenters also indicated that a link 
to Investor.gov or a similar educational website would be helpful. 
See, e.g., Baker Feedback Form (``I found the document overall 
extremely useful and learned, most importantly, to refer to the 
sec.gov website often''); Shepard Feedback Form (``An investing.gov 
[sic] website seems to be a useful source''); Smith2 Feedback Form 
(``would like to see a link included to a site or sites that contain 
general investment information'').
    \257\ See, e.g., MassMutual Letter (``The SEC provides a wealth 
of information at www.investor.gov for educational purposes . . . 
Providing general information about broker-dealers and investment 
advisers in a consistent and readily-accessible [sic] space on the 
SEC's website would allow each firm to use the space available in 
Form CRS to accurately describe its brokerage and advisory services, 
with tailored language to reflect its business model, products and 
services offered and conflicts of interest.'').
    \258\ See Kleimann II, supra footnote 19 (``Many participants 
said that they would use the investor.gov site . . . [and] that they 
would put a high level of trust in whatever information would be on 
the site because it was a government site.''); RAND 2018, supra 
footnote 13 (finding that two-thirds of investors would be ``very 
likely'' or ``somewhat likely'' to click on a hyperlink for investor 
education materials).
    \259\ See Kleimann I, supra footnote 19 (``None [of the study 
participants] had a clear idea of the information that would be 
provided at Investor.gov.''); see also Kleimann II, supra footnote 
19 (``Many participants said that they would use the investor.gov 
site to research the firm, but few knew what specific information 
would be at that site . . .'').
---------------------------------------------------------------------------

2. Relationships and Services
    As proposed, after the introduction firms will be required to 
summarize the relationships and services that they offer to retail 
investors. They will use a revised heading, ``What investment services 
and advice can you provide me? '', which follows the new question-and-
answer format.\260\ Several commenters used this question or a similar 
heading in mock-ups they provided.\261\ Generally as proposed, we are 
requiring firms to provide information about specific aspects of their 
brokerage and investment advisory services, with modifications from the 
proposal to permit firms to use their own wording to cover these 
topics.
---------------------------------------------------------------------------

    \260\ Item 2.A. of Form CRS.
    \261\ See, e.g., IAA Letter I; LPL Financial Letter; Primerica 
Letter ; SIFMA Letter; Wells Fargo Letter; Fidelity Letter; Schwab 
Letter I (mock-up). We proposed requiring the heading, ``[Types of] 
Relationships and Services.'' As discussed above, many commenters 
recommended that the relationship summary use a question-and-answer 
format as a more engaging approach for retail investors.
---------------------------------------------------------------------------

    We proposed separate instructions for firms to describe brokerage 
account services and investment advisory account services. Firms would 
have used a mix of prescribed wording and their own wording to provide 
a summary overview of fees and certain required topics, including the 
scope of advice services, investment discretion, monitoring, and 
significant limitations on investments available to retail 
investors.\262\ We received feedback from the observations in the RAND 
2018 report, other surveys and studies and on Feedback Forms that 
relationships and services is an important area to cover,\263\ and that 
investors learned important information from the prescribed wording on 
relationships and services.\264\ In addition, the IAC recommended that 
the Commission adopt a uniform, plain English disclosure for retail 
investors that would include basic information ``about the nature of 
services offered,'' among other

[[Page 33516]]

things.\265\ However, some commenters expressed concern that, without 
more educational content, this approach would not sufficiently inform 
or would confuse retail investors.\266\ One commenter pointed out that 
the proposed instructions dictated different ways for broker-dealers 
and investment advisers to describe similar services.\267\ These 
commenters suggested including more explanatory wording or definitions 
to cover what services are typically associated with brokerage accounts 
and investment advisory accounts, to provide more background 
information to help retail investors understand the firm-specific 
disclosures.\268\ At the same time, commenters noted that summary, 
prescribed wording for this section may not accurately describe the 
services of every broker-dealer or investment adviser.\269\ Results of 
the RAND 2018 survey reflected these concerns and showed that almost a 
quarter of survey respondents (22.2%) described the relationships and 
services section as ``difficult'' or ``very difficult'' to 
understand.\270\ Comments from participants in qualitative interviews 
reported in the RAND 2018 report, as well as comments from roundtable 
participants and on Feedback Forms, indicated that prescribed terms 
such as ``transaction-based fee,'' ``asset-based fee,'' ``discretionary 
account,'' and ``non-discretionary account'' contributed to this 
difficulty.\271\
---------------------------------------------------------------------------

    \262\ See, e.g., Proposed Item 2.B. of Form CRS (``If you are a 
broker-dealer that offers brokerage accounts to retail investors, 
summarize the principal brokerage services that you provide to 
retail investors.''); and Proposed Item 2.C. of Form CRS (``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.'').
    \263\ See RAND 2018, supra footnote 13 (next to fees and costs, 
survey participants responded the relationships and services section 
was one of the most informative; more than 56% of survey 
participants said to keep the section the same length); see also 
Cetera Letter II (Woelfel) supra footnote 17 (85% of survey 
participants responded that this section was very or somewhat 
important); Schwab Letter I (Koski) supra footnote 21 (54% of survey 
participants selected ``a description of the investment advice 
services the firm will provide to me'' from a menu of 11 subjects as 
one of the four most important things for firms to communicate). In 
addition, nearly 90% of Feedback Form commenters graded this section 
as ``very useful'' or ``useful.'' See Feedback Forms Comment Summary 
supra footnote 11 (summary of responses to Question 2(a)).
    \264\ See RAND 2018, supra footnote 13 (in qualitative 
interviews, participants appeared to have ``a general understanding 
that this section describes two different services or accounts that 
a client would choose''); Kleimann I, supra footnote 19 (while study 
authors found that participants had difficulty with ``sorting out 
the similarities and differences,'' this study also reports that 
``[n]early all participants easily identified a key difference 
between the Brokerage Accounts and Advisory Accounts as the fee 
structure either being tied to transactions or to assets. Some 
further identified as a key difference who had the final approval on 
all transactions, seeing the Brokerage Account as giving them more 
control on making the final decision.'').
    \265\ See IAC Broker-Dealer Fiduciary Duty Recommendations, 
supra footnote 10; and IAC Form CRS Recommendation, supra footnote 
10.
    \266\ See CFA Letter I (``We believe the Commission should . . . 
require firms to be crystal clear about the nature of the services 
they offer. Simply telling [investors] that the account is a 
brokerage account or an advisory account doesn't necessarily convey 
useful information.''); CFA Institute Letter I (``Given the 
similarities to what investment advisers offer, CRS disclosure of 
these additional services will likely confuse investors without 
language clarifying that they are outside of their usual broker-
dealer duties and would typically require a separate contract.'').
    \267\ CFA Letter I.
    \268\ See CFA Letter I (suggesting prescribed wording for how 
typical broker-dealers and investment advisers might describe their 
services); CFA Institute Letter I (suggesting alternative wording 
for how broker-dealers might describe their services). Commenters on 
Feedback Forms also asked for explanatory wording and definitions. 
See Feedback Forms Comment Summary, supra footnote 11 (summary of 
responses to Question 4) (seven commenters asked for definitions of 
terms such as transaction-based fee, asset-based fee or wrap fee; 10 
asked for a definition or better explanation of the term 
``fiduciary''); see also, Bhupalam Feedback Form (``The definition 
of a broker dealer [sic] and investment advisory [sic] is not very 
clear.''); Daunheimer Feedback Form (``For a novice investor, all 
terms that seasoned investors take for granted, are new to them. 
Consider making the language as simple as possible.''); Margolis 
Feedback Form (``wording is very confusing and not very accurate''); 
Anonymous27 Feedback Form (``define better''), but see Baker 
Feedback Form (``the discussion of differences among the 
relationships is very useful as it describe [sic] the differences in 
services provided . . . and most importantly, the difference between 
a commission-based fee and an `asset-value' fee''); Hawkins Feedback 
Form (``Summary does a good job of explaining the basis [sic] 
services for a brokerage vs advisory account. Some clearer examples 
could help.''); Rohr Feedback Form (``Makes clear how a 
discretionary account differs from a brokerage account'').
    \269\ See, e.g., MassMutual Letter (explaining that the 
prescribed wording that a customer will pay a commission each time a 
security is bought and sold is not universally true, e.g., for 
mutual funds and variable annuities with internal exchange programs, 
which allow a customer to switch from one investment to another 
without paying a commission); CFA Letter I (recognizing that a 
generalized description of portfolio management services, included 
for purposes of educating investors, does not apply to all business 
model among registered investment advisers).
    \270\ RAND 2018, supra footnote 13. In the RAND 2018 qualitative 
interviews, participants noted several phrases that raised concerns 
such as ``additional services'' and ``might pay more'' and 
identified terms that needed further definition. Id. Another 
interview-based investor study found that ``[p]articipants were 
quite mixed in their understanding about the advice and monitoring 
that was offered in the two accounts'' when presented with the 
proposed sample dual registrant relationship summary. Kleimann I, 
supra footnote 19.
    \271\ RAND 2018, supra footnote 13; see also Betterment Letter I 
(Hotspex) supra footnote 18 (finding that ``respondents found 
certain terminology (e.g., `fiduciary,' `asset-based,' `ETF') to be 
unclear or lack sufficient detail''). Roundtable discussions found 
similar results. See, e.g., Philadelphia Roundtable (participant 
finding ``transaction-based fee'' to be complex); Miami Roundtable 
(participant stating that ``most people don't really understand'' 
what fiduciary duty means); see also Feedback Forms Comment Summary, 
supra footnote 11 (summary of responses to Question 4) (Seven 
Feedback Forms included narrative comments that asked for 
definitions of terms such as ``transaction-based fee,'' ``asset-
based fee'' or ``wrap fee;'' 10 asked for explanation or definition 
of the term ``fiduciary''); Anonymous06 Feedback Form (``Definitions 
might not be understood transaction based vs asset based fee''); 
Baker Feedback Form (``It may be more helpful to have detailed 
definitions (Ex. ``transaction-based fee'') that, unfortunately, 
result in a longer document.''); Bhupalam Feedback Form 
(``definition of a broker dealer [sic] and investment advisory [sic] 
is not very clear''); Starmer2 Feedback Form (``Spell out . . . best 
interest'').
---------------------------------------------------------------------------

    As discussed in Section II.A.1. above, we are sensitive to the 
potential inaccuracies and confusion that the prescribed wording can 
create. We also recognize that in some cases, providing instructions 
that require broker-dealers and investment advisers to describe similar 
services in different ways can create confusion. Accordingly, we have 
revised the instructions to allow firms to use more of their own 
wording. We also eliminated the separate instructions for brokerage 
account services and investment advisory account services, and instead 
are adopting one set of instructions that generally applies the same 
requirements to all firms.\272\ To facilitate comparison of firms' 
relationships and services, however, we have retained the concept of 
specific sub-topics that each firm must cover in this section.\273\
---------------------------------------------------------------------------

    \272\ See, e.g., Item 2.B. of Form CRS (requiring all firms to 
summarize their principal services but requiring broker-dealers to 
state whether or not they offer recommendations and investment 
advisers to state the particular types of advisory services they 
offer).
    \273\ As discussed in Section II.A.2 above, we are not requiring 
that these sub-topics follow a prescribed order, so firms are able 
to tailor the presentation of their services, as well as include 
additional information about their brokerage or advisory services, 
so long as the description covers all applicable topics. See supra 
footnote 121 and accompanying text.
---------------------------------------------------------------------------

    Another change from the proposed instructions relates to a concern 
regarding how accounts were delineated. The proposed instructions would 
have applied based on whether or not broker-dealers and investment 
advisers offered brokerage accounts or investment advisory accounts to 
retail investors and would have included some prescribed language 
referencing accounts.\274\ Insurance and variable annuity providers 
commented that this focus on accounts would not allow them to 
accurately describe insurance offerings and would be confusing, 
particularly to investors whose insurance or annuity products are held 
directly with an issuing insurance company.\275\ We agree and have 
replaced references to accounts in this section with references to 
``services, accounts, or investments you make available to retail 
investors.'' \276\
---------------------------------------------------------------------------

    \274\ See, e.g., Proposed Items 2.B.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 . . . .'') and 2.C.4. 
(``If you significantly limit the types of investments available to 
retail investors in any accounts, include the following . . . .'') 
of Form CRS. In addition, some of the prescribed wording included 
language specific to accounts. See, e.g., Proposed Item 2.B.1. of 
Form CRS. Broker-dealers would state, ``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.''
    \275\ E.g., ACLI Letter; Committee of Annuity Insurers Letter; 
IRI Letter; MassMutual Letter; New York Life Letter; Northwestern 
Mutual Letter.
    \276\ Item 2.B. of Form CRS.
---------------------------------------------------------------------------

a. Description of Services
    The final instructions have an overarching requirement to state 
that the firm offers brokerage services, investment advisory services, 
or both, to retail investors, and to summarize the principal services, 
accounts, or investments the firm makes available to retail 
investors.\277\ A firm also must include any material limitations on 
those services.\278\ The final instructions require firms to include 
certain

[[Page 33517]]

information in their descriptions. Similar to the proposal, broker-
dealers must state the particular types of principal brokerage services 
the firm offers to retail investors, including buying and selling 
securities, and whether or not they offer recommendations to retail 
investors (i.e., to distinguish execution-only services).\279\ 
Investment advisers must state the particular types of principal 
advisory services they offer to retail investors, including, for 
example, financial planning and wrap fee programs.\280\ The final 
instructions do not, however, require prescribed wording to describe 
the particular characteristics of these services, as did the proposed 
instructions.\281\ Commenters argued that the proposed prescribed 
wording may not accurately describe the services of every broker-dealer 
or investment adviser.\282\ As discussed in Section II.A.1 above, given 
that investors may be confused by information that does not directly 
relate to the firm's offerings, we are allowing firms to use their own 
wording to describe their own services. Therefore, unlike the proposal, 
the final instructions do not prescribe specific wording for firms to 
describe the particular characteristics of these services.\283\
---------------------------------------------------------------------------

    \277\ Item 2.B. of Form CRS.
    \278\ Item 2.B. of Form CRS.
    \279\ Item 2.B. of Form CRS.
    \280\ Item 2.B. of Form CRS.
    \281\ See, e.g., Proposed Item 2.B.2. of Form CRS (requiring 
broker-dealers (i) that only offer accounts in which they offer 
recommendations to retail investors to state that the retail 
investor may select investments or the broker-dealer 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'' and 
(ii) that do not offer recommendations to state that the retail 
investor ``will select the investments'' and ``will make the 
ultimate investment decision regarding the investment strategy and 
the purchase or sale of investments'').
    \282\ See, e.g., MassMutual Letter (explaining that the 
prescribed wording that a customer will pay a commission each time a 
security is bought and sold is not universally true, e.g., for 
mutual funds and variable annuities with internal exchange programs, 
which allow a customer to switch from one investment to another 
without paying a commission); CFA Letter I (recognizing that a 
generalized description of portfolio management services, included 
for purposes of educating investors, does not apply to all business 
models among registered investment advisers).
    \283\ See generally Items 2.B.(i) through 2.B.(v) of Form CRS.
---------------------------------------------------------------------------

    Some commenters raised concerns about investor confusion if both 
broker-dealers and investment advisers discuss the advice they provide 
in the relationship summary. To mitigate that confusion, some 
commenters called for an explicit statement that broker-dealers are in 
sales relationships.\284\ In response to these concerns, we added the 
explicit requirement that broker-dealers state that they buy and sell 
securities, in order to clarify their principal services.\285\ We also 
have included a note in the final instructions that broker-dealers 
offering recommendations should consider the applicability of the 
Investment Advisers Act of 1940, consistent with SEC guidance.\286\
---------------------------------------------------------------------------

    \284\ See, e.g., CFA Institute Letter I; Consumers Union Letter; 
see also Kleimann II, supra footnote 19 (alternative wording for 
redesigned relationship summary described broker-dealer services as 
a ``sales relationship'').
    \285\ See Item 2.B of Form CRS (``For broker-dealers, state the 
particular types of principal brokerage services you offer, 
including buying and selling securities, and whether or not you 
offer recommendations to retail investors.'').
    \286\ See Item 2.B.(ii) to Form CRS. See Solely Incidental 
Release, supra footnote 47.
---------------------------------------------------------------------------

    The final instructions require all firms to address the following 
topics in the description of their services: (i) Monitoring; (ii) 
investment authority; (iii) limited investment offerings; and (iv) 
account minimums and other requirements.\287\ As discussed further 
below, the final instructions require firms to include much of the same 
substantive information as proposed, but rely less on prescribed 
wording and assumptions regarding typical brokerage and investment 
advisory accounts.\288\ In response to comments, we added a new 
requirement for firms to disclose whether or not they have account 
minimums.\289\ Commenters recommended that we include information about 
account minimums in the relationship summary.\290\ In addition, a 
number of commenters submitting mock-ups included disclosures on 
account minimums in their forms.\291\ We agree this information is 
important to investors when they are deciding on account types and 
services, particularly as they consider the amount of funds they are 
planning to invest and whether they may incur any fees or become 
ineligible for certain services if their accounts fall under certain 
dollar thresholds. We also removed requirements to discuss fees at the 
beginning of this section \292\ and are consolidating these 
requirements with other related ones in the fees, costs, conflicts, and 
standard of conduct section, as discussed below.\293\ We also are not 
adopting a proposed requirement to describe any regular communications 
with retail investors.\294\ Neither the RAND 2018 report nor other 
surveys and studies suggested that this information was important to 
investors, as compared to fees. Mock-ups submitted by commenters also 
did not include this disclosure, underscoring the relative importance 
of other topics. Given the goal of limiting the length of the 
relationship summary so that investors remain engaged and are not 
overwhelmed by the information, we decided to prioritize requiring 
other information in the relationship summary.
---------------------------------------------------------------------------

    \287\ Item 2.C. of Form CRS.
    \288\ In the proposed instructions, assistance with developing 
or executing the retail investor's strategy and monitoring the 
performance of the retail investor's account were characterized as 
additional services for broker-dealers. The final instructions do 
not make this distinction and instead permit firms more flexibility 
to describe their services accurately. See Proposed Item 2.B.3. of 
Form CRS.
    \289\ Item 2.B.(iv) to Form CRS (``Explain whether or not you 
have any requirements for retail investors to open or maintain an 
account or establish a relationship, such as minimum account size or 
investment amount.'').
    \290\ See, e.g., NASAA Letter (``Form CRS should specify minimum 
account size and include information on miscellaneous fees different 
categories of investors can expect to pay.''); Cetera Letter I (Form 
CRS should include ``[w]hether or not the firm has established 
standards for the minimum or maximum dollar amount of various 
account types.'').
    \291\ See, e.g., Primerica Letter and Cetera Letter I.
    \292\ See Proposed Items 2.B.1. (broker-dealers) (``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.''); and 2.C.1. (investment advisers) (``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.'') 
of Form CRS.
    \293\ See infra footnotes 373-375 and accompanying text.
    \294\ See Proposed Items 2.B.3. (broker-dealers) and 2.C.2. 
(investment advisers) of Form CRS (``Briefly describe any regular 
communications you have with retail investors, including the 
frequency and method of the communications.'').
---------------------------------------------------------------------------

    Monitoring. The final instructions require both broker-dealers and 
investment advisers to explain whether or not they monitor retail 
investors' investments, including the frequency and any material 
limitations of that monitoring, and if so, whether or not the 
monitoring services are part of the firm's standard services.\295\ In 
the proposal, different instructions concerning monitoring applied to 
broker-dealers and investment advisers. Broker-dealers would have 
stated whether they monitored the performance of retail investors' 
accounts, and if so, how frequently they performed such monitoring, 
whether it constituted additional services or was part of the broker-
dealer's standard services, and whether a retail investor would pay 
more for it.\296\ Investment advisers

[[Page 33518]]

would have stated how frequently they monitor retail investors' 
accounts.\297\
---------------------------------------------------------------------------

    \295\ Item 2.B.(i) of Form CRS.
    \296\ Proposed Item 2.B.3. of Form CRS.
    \297\ Proposed Item 2.C.2. of Form CRS.
---------------------------------------------------------------------------

    One commenter objected to the requirement for broker-dealers to 
describe additional services, including monitoring, on the basis that 
the information would add little value.\298\ On the other hand, several 
commenters suggested that understanding the degree to which firms 
monitor the performance of their investments can be important to 
investors.\299\ One of these commenters noted that broker-dealers and 
investment advisers have different legal obligations to monitor 
accounts, and that differences would remain even under Regulation Best 
Interest.\300\ Observations from surveys and studies indicated that 
investors are interested in or may benefit from clarification of 
monitoring services.\301\ For example, an overwhelming majority of 
participants in the OIAD/RAND study believed that a financial 
professional required to act in an investor's best interest would 
monitor the investor's account on an on-going basis.\302\ In 
qualitative interviews in the RAND 2018 report, participants seemed to 
distinguish brokerage and investment advisory accounts and assess which 
type of relationship was a better fit for different investors based on 
assumptions concerning monitoring.\303\ Other surveys and studies also 
showed that participants varied in their understanding of monitoring 
and whether they should expect firms to monitor their account.\304\
---------------------------------------------------------------------------

    \298\ See Wells Fargo Letter (recommending elimination of 
broker-dealer description of additional services because it could 
take up substantial space and adds little value for the investor).
    \299\ See, e.g., Comment Letter of the St. John's Law School 
Securities Arbitration Clinic (Aug. 7, 2018) (``St. John's Law 
Letter''); CFA Letter I (discussing investors' expectations of a 
fiduciary duty based on whether and to what degree a firm or 
financial professional provides monitoring services); Comment Letter 
of the Commonwealth of Massachusetts (Aug. 7, 2018) (``Massachusetts 
Letter'') (suggesting that the payment of ongoing compensation, such 
as a trail commission, indicates an ongoing relationship and should 
carry ongoing duties to monitor the investment); IAA Letter I 
(stating that, just as an adviser's duty to monitor extends to all 
personalized advice it provides a client, so should investors expect 
a similar duty from broker-dealers when providing monitoring 
services).
    \300\ See CFA Letter II.
    \301\ See, e.g., RAND 2018, supra footnote 13 (in qualitative 
interviews, ``participants were sometimes unclear on how a financial 
professional would monitor an account'' and ``some participants were 
unclear on how frequently monitoring would occur'').
    \302\ See OIAD/RAND (finding that 69% of all participants in the 
survey, 75% of a specialized group defined as ``investors,'' and 86% 
of a specialized group defined as ``investment advice consumers'' 
believed that best interest required ongoing monitoring).
    \303\ See RAND 2018, supra footnote 13 (in qualitative 
interviews, ``some felt that brokerage accounts are better for those 
with investment expertise and time to dedicate to investing, whereas 
advisory accounts are better for those who have less expertise and/
or less time to monitor investments''; one participant was confused 
by a statement that the firm could provide ``additional services to 
assist you and monitor performance'' and wanted to know up front 
which services would be included and which would cost extra.).
    \304\ See Kleimann I, supra footnote 19 (``Participants assumed 
that the level of advice and monitoring provided in the two accounts 
would be the same. They defined monitoring as constant looking at 
the market and their accounts and making sure their accounts were 
making money''); Betterment Letter I (Hotspex) supra footnote 18 
(among survey participants reviewing a standalone adviser 
relationship summary designed to follow the proposal sample, only 
37% correctly identified as ``false'' a statement that broker-
dealers typically monitor client's portfolios and provide advice on 
an ongoing basis).
---------------------------------------------------------------------------

    We disagree with the comment that requiring broker-dealers to 
describe monitoring services would add little value. As we also state 
in the Regulation Best Interest Release, we believe that it is 
important for retail customers to understand (1) the types of 
monitoring services (if any) a particular broker-dealer provides, and 
(2) whether the broker-dealer will be monitoring the particular retail 
customer's account.\305\ We also agree with commenters that monitoring 
is an important distinguishing feature of different investment services 
and believe that retail investors should have accurate expectations of 
the types of monitoring firms offer. We are therefore requiring firms 
to explain whether or not they monitor retail investors' investments, 
and if so, the frequency, material limitations, and whether or not 
monitoring is offered as part of the firm's standard services.\306\
---------------------------------------------------------------------------

    \305\ See Regulation Best Interest Release, supra footnote 47; 
see also Solely Incidental Release, supra footnote 47.
    \306\ Item 2.B.(i) of Form CRS.
---------------------------------------------------------------------------

    The proposal provided different instructions for broker-dealers and 
investment advisers concerning monitoring, requiring broker-dealers to 
discuss monitoring of account performance only if they offered it, and 
requiring investment advisers to disclose how frequently they monitor 
retail investors' accounts, as monitoring is generally part of ongoing 
advisory services.\307\ Even with the different wording for broker-
dealers and investment advisers as proposed, some participants in 
investor studies still assumed that the level of monitoring was the 
same between broker-dealers and investment advisers.\308\ As discussed 
above, we believe it is important for firms to describe more accurately 
and precisely the monitoring that they actually do for retail 
investors. Therefore, we are retaining, with slight modifications, the 
obligation to disclose monitoring services, applying the same 
instruction to both broker-dealers and investment advisers, and 
eliminating the prescribed wording. The final instructions pertain to 
monitoring services generally and are not limited to monitoring for 
account performance only; to the extent firms describe monitoring 
services, they must include the frequency and any material limitations 
on these services and whether or not they are offered as part of the 
firm's standard services. We believe that subjecting firms to the same 
requirements to describe their own monitoring services, including a 
specific statement that they do not provide monitoring, if that is the 
case, will better facilitate investor understanding of whether any 
monitoring is provided and if so, the scope and type of such service. 
This approach also may result in more comparable information so that 
retail investors can understand the key differences among monitoring 
services by different firms based on firm-specific descriptions.
---------------------------------------------------------------------------

    \307\ See Fiduciary Release, supra footnote 47.
    \308\ See Kleimann I, supra footnote 19, at 10 (``Some 
participants assumed that the advice and level of monitoring was the 
same.''); Betterment Letter I (Hotspex) supra footnote 18 (among 
survey participants reviewing a standalone investment adviser's 
relationship summary designed to follow the proposal, only 37% 
correctly identified as ``false'' a statement that broker-dealers 
typically monitor client's portfolios and provide advice on an 
ongoing basis).
---------------------------------------------------------------------------

    Investment Authority. The final instructions require investment 
adviser firms that accept discretionary authority to describe those 
services and any material limitations on that authority. Broker-dealers 
may, but are not required, to state whether they accept limited 
discretionary authority. Both investment advisers that offer non-
discretionary services and broker-dealers must explain that the retail 
investor makes the ultimate decision regarding the purchase or sale of 
investments.\309\
---------------------------------------------------------------------------

    \309\ Item 2.B.(ii) of Form CRS.
---------------------------------------------------------------------------

    Commenters and results from the RAND 2018 qualitative interviews 
suggested modifications to the proposed investment authority 
disclosures in the relationship summary but generally supported 
including this topic.\310\ In

[[Page 33519]]

addition, various commenters submitting their own mock-ups included 
disclosures on investment authority in their relationship 
summaries.\311\ One commenter also alluded to disputes that can arise 
when investors misunderstand the investment authority the financial 
professional exercises for different accounts.\312\ One investor study 
indicated that only a few investors understood from the proposed sample 
dual-registrant relationship summary that non-discretionary advisory 
accounts offer investors the ability to approve recommendations.\313\ 
Some RAND 2018 interview participants indicated that further 
definitions of ``discretionary account'' and ``non-discretionary 
account'' would be helpful.\314\
---------------------------------------------------------------------------

    \310\ See CFA Letter I (stating that it is necessary for firms 
to describe the various types of discretionary and/or non-
discretionary accounts they offer with specificity for such 
information to be useful to investors in choosing among providers 
for financial services); CFA Institute (suggesting that investment 
advisers only be required to discuss the type of accounts they offer 
(i.e., discretionary and/or nondiscretionary accounts) because 
discussing both--when not both are offered--would be confusing to 
customers); Betterment Letter I (stating that some of the prescribed 
language concerning investment authority may lead to more confusion 
than it clarifies); RAND 2018 report, supra note 13 (participants in 
qualitative interviews stated that it would be helpful if the 
relationship summary provided clearer definitions of ``discretionary 
account'' and ``non-discretionary account''); see also Kleimann I, 
supra note 19 (noting that some ``identified a key difference as who 
had final approval on all transactions, seeing the Brokerage Account 
as giving them more control'' and only a few ``recognized that non-
discretionary advisory accounts also offer this option.''). One 
Feedback Form commenter also noted that explanation of non-
discretionary accounts was not clear. See Shaffer Feedback Form 
(broker-dealer recommendation and investment adviser ``non-
discretionary'' account seem very similar. I was asking: ``what's 
the difference.''), but see Asen Feedback Form (``The Relationship 
and Services section for BDs is clear in that the investment 
decision is the customer's . . .''); Rohr Feedback Form (``makes 
clear how a discretionary account differs from a brokerage 
account'').
    \311\ See, e.g., Stifel Letter; AALU Letter; Wells Fargo Letter; 
Cetera Letter I; LPL Financial Letter; IAA Letter I; Primerica 
Letter; ASA Letter.
    \312\ See St. John's Law Letter (describing an arbitration case 
in which investor was not informed of a change in investment 
authority when the account type changed).
    \313\ See Kleimann I, supra footnote 19 (noting that some 
``identified a key difference as who had final approval on all 
transactions, seeing the Brokerage Account as giving them more 
control'' and only a few ``recognized that non-discretionary 
advisory accounts also offer this option.'').
    \314\ See RAND 2018, supra footnote 13 (participants in 
qualitative interviews stated that it would be helpful if the 
relationship summary provided clearer definitions of ``discretionary 
account'' and ``non-discretionary account'').
---------------------------------------------------------------------------

    We continue to believe that it is important for investors to 
understand whether they or the firm or financial professional 
ultimately makes the investment decision in the relationship or service 
that they are considering. Accordingly, the final instructions 
generally require disclosure of the same substantive information on 
this topic as the proposed instructions, but in a less prescriptive 
way. As discussed in Section II.A.1, above, we believe that allowing 
firms to use their own wording to describe their discretionary and non-
discretionary offerings and explaining what that means to retail 
investors in terms of who makes the ultimate investment decisions can 
lead to disclosures that are more meaningful and less confusing. We 
recognize that some investor feedback suggested that further 
definitions of ``discretionary account'' and ``non-discretionary 
account'' would be useful. While the final instructions do not require 
prescribed wording including these terms, as the proposed instructions 
would have required, the final instructions do require investment 
advisers that accept discretionary authority to use their own wording 
to explain similar information.\315\
---------------------------------------------------------------------------

    \315\ Item 2.B.(ii) to Form CRS.
---------------------------------------------------------------------------

    The final instructions provide that investment advisers that accept 
discretionary authority will be required to describe these services and 
any material limitations on that authority.\316\ Additionally, any such 
summary must include the specific circumstances that would trigger that 
discretionary authority and any material limitations.\317\ Investment 
advisers may, for example, explain whether they seek the retail 
investor's approval before implementing or changing investment 
strategies or executing certain transactions. In comparison, the 
proposed instructions took a more prescriptive approach.\318\ For 
example, the proposed instructions prescribed wording for investment 
advisers to include in their relationship summaries if they offer a 
discretionary account.\319\ We believe that the more general final 
instruction provides investment advisers with the flexibility to 
describe their discretionary offerings more accurately.
---------------------------------------------------------------------------

    \316\ Item 2.B.(ii) of Form CRS.
    \317\ Item 2.B.(ii) of Form CRS.
    \318\ Compare Item 2.B.(ii) of Form CRS with Proposed Item 2.C.3 
of Form CRS (``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.'').
    \319\ See Proposed Item 2.C.3. of Form CRS (``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.'').
---------------------------------------------------------------------------

    For broker-dealers, the final instructions provide that they may, 
but are not required to, state whether they accept limited 
discretionary authority.\320\ We have made this disclosure optional for 
broker-dealers because of our understanding that these services may not 
be a significant part of broker-dealers' services.\321\ Accordingly, 
describing them here may detract from disclosure of other items that 
better characterize the firm's business and would be more helpful to 
investors. If limited discretion services are a significant part of a 
broker-dealer's business, for example, if limited discretion services 
constitute material facts relating to the scope and terms of the 
relationship with the retail customer that need to be disclosed under 
Regulation Best Interest, that broker-dealer may wish to include in its 
relationship summary a statement that it offers limited discretion 
services.
---------------------------------------------------------------------------

    \320\ Compare Item 2.B.(ii) of Form CRS with Proposed Item 
2.B.2, which instructed broker-dealers: ``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.''
    \321\ See discussion on discretionary authority in Solely 
Incidental Release, supra footnote 47; see also footnotes 284-286 
and accompanying text.
---------------------------------------------------------------------------

    Finally, both broker-dealers and investment advisers that offer 
non-discretionary services must explain that the retail investor makes 
the ultimate decision regarding the purchase or sale of 
investments.\322\ Under the proposed instructions, firms would have 
been required to explain whether they offer non-discretionary services 
and what that means, but using prescribed wording. Investment advisers 
would have been required to state that they give advice and the retail 
investor decides what investments to buy and sell.\323\ Broker-dealers 
would have been required to state that the retail investor will make 
the ultimate investment decision regarding the investment strategy and 
the purchase or sale of investments, in addition to other prescribed 
wording to distinguish execution-only accounts from those in which the 
broker-dealer would offer recommendations.\324\ The final

[[Page 33520]]

instructions require firms to explain to retail investors that they 
make the ultimate investment decision in non-discretionary accounts, 
but do not include requirements to use prescribed wording or references 
to account types. This change is consistent with our general approach 
described above that such prescribed wording may be confusing or may 
not sufficiently cover the discretionary and non-discretionary services 
a firm may offer.\325\
---------------------------------------------------------------------------

    \322\ Item 2.B.(ii) of Form CRS.
    \323\ See Proposed Instruction to Item 2.C.3. of Form CRS (``If 
you offer a non-discretionary account, state that you give advice 
and the retail investor decides what investments to buy and 
sell.'').
    \324\ See Proposed Item 2.B.2. of Form CRS (``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.'').
    \325\ See, e.g., CFA Letter I (suggesting that Form CRS should 
require advisers to discuss only what they offer in terms of 
discretionary or nondiscretionary accounts, because discussing both 
types when they offer only one would confuse investors); IAA Letter 
I (suggesting that the proposed prescribed wording would not cover 
sufficiently the variety of discretionary or non-discretionary 
advisory services a firm may offer and offering alternative 
language).
---------------------------------------------------------------------------

    Limited Investment Offerings. The final instructions require firms 
to explain whether or not they make available or offer advice only with 
respect to proprietary products, or a limited menu of products or types 
of investments. If so, they must also describe the limitations.\326\ In 
comparison, the proposed instructions included prescribed wording for 
firms to include if they significantly limit the types of investments 
in any accounts.\327\ Specifically, broker-dealers would have stated, 
``We offer a limited selection of investments. Other firms could offer 
a wider range of choices, some of which might have lower costs.'' \328\ 
Investment advisers would have stated, ``Our investment advice will 
cover a limited selection of investments. Other firms could provide 
advice on a wider range of choices, some of which may have lower 
costs.'' \329\ The proposed instructions gave examples of what might 
constitute a significant limitation on the types of investments, 
specifically, offering only one type of asset (e.g., mutual funds, 
exchange-traded funds, or variable annuities); mutual funds or other 
investments sponsored or managed by the firm or an affiliate, i.e., 
proprietary products; or only a small number of investments.\330\ If 
these limits applied only to certain accounts the proposed instructions 
would have required firms to identify those accounts.\331\
---------------------------------------------------------------------------

    \326\ Item 2.C.(iii) of Form CRS.
    \327\ The Proposed Items stated, ``If you significantly limit 
the types of investments available to retail investors in any 
accounts, include the following . . . .'' Proposed Items 2.B.4. and 
2.C.4. of Form CRS.
    \328\ Proposed Item B.4. of Form CRS.
    \329\ Proposed Item C.4. of Form CRS.
    \330\ Proposed Items B.4. and C.4. of Form CRS.
    \331\ Proposed Items B.4. and C.4. of Form CRS.
---------------------------------------------------------------------------

    Comments were mixed on the proposed instruction concerning limited 
investment offerings. Several commenters acknowledged the importance of 
investors understanding limitations on investments.\332\ Results of 
RAND 2018 qualitative interviews also indicated that investors would 
like to understand limits on investment offerings.\333\ Some commenters 
expressed concerns that the proposed disclosure would not be of 
sufficient value to investors.\334\ A number of commenters, whether or 
not they supported generally requiring firms to discuss limitations on 
investments, expressed concerns that the scope of ``significantly 
limits'' in the proposed instructions or ``limited selection of 
investments'' was not sufficiently clear.\335\ Furthermore, a few 
commenters expressed concern that the prescribed wording (``Other firms 
could offer a wider range of choices, some of which might have lower 
costs.'') unduly prioritized cost over other investment product 
features or characteristics.\336\
---------------------------------------------------------------------------

    \332\ See CFA Letter I; CFA Institute Letter I; New York Life 
Letter; see also mock-ups submitted by commenters that included the 
``limited selection of investments'' wording or substantially 
similar wording. See Fidelity Letter; IAA Letter I; IRI Letter. 
These mock-ups did not elaborate on what the limitations are.
    \333\ See RAND 2018, supra footnote 13 (from qualitative 
interviews, finding that ``[p]articipants reacted strongly to the 
notion of being offered limited investment options'').
    \334\ See CFA Letter I (``[W]e fear the proposed disclosure 
provides too little information to be of value to the investor.''); 
CFA Institute Letter I (suggesting that the disclosure expressly 
state that performance may be lower due to higher costs).
    \335\ See CFA Letter I (``But simply stating they offer 
``limited'' investments is not enough, as that will mean different 
things to different investors.''); Prudential Letter (``It is 
unclear what `significantly limits' means for firms that offer 
predominantly, but not exclusively, proprietary products. It is also 
unclear what constitutes a `small choice of investments.' Additional 
examples or more prescriptive instructions regarding when firms must 
disclose such limitations would be helpful.''); CFA Letter I 
(``[F]irms should have to describe how they limit the selection of 
investments.''); Wells Fargo Letter (``This requirement appears to 
be overly broad as no firm can offer all investments and we 
therefore recommend that this be limited to those broker-dealers 
that only offer one type of product.'').
    \336\ See, e.g., New York Life Letter (``[T]he Commission's 
exclusive emphasis on cost in this prescribed sentence does not 
provide consumers of insurance products with clear and complete 
information.''); Mutual of America Letter (``We believe that this 
focus on cost alone is not necessarily in the best interest of 
retail consumers, who may benefit from high-value products, such as 
variable annuities.''); Lincoln Financial Group Letter (suggesting 
that either the Form CRS or Regulation Best Interest disclosure 
obligation should allow for descriptions of product benefits to 
retail investors as well as costs). Another commenter noted that the 
prescribed wording about other firms' offerings could raise First 
Amendment concerns. See CFA Letter I (``[R]equiring firms to compare 
their own services unfavorably to those of their competitors may 
raise First Amendment concerns.''). See supra footnotes 77-85 and 
accompanying text.
---------------------------------------------------------------------------

    We continue to believe that firms that limit product menus--such as 
offering only proprietary products or a specific asset class--should be 
required to describe those limitations in the relationship 
summary.\337\ Other examples include limitations based on products that 
involve third-party arrangements, such as revenue sharing and mutual 
fund service fees. We agree with commenters who advocated for helping 
investors before entering into a relationship with a firm to understand 
whether a firm limits its product offerings, and to what extent.\338\ 
In light of comments, we have determined, however, that the proposed 
prescribed wording may not allow all firms to describe limited 
investment offerings, if applicable, in a way that is accurate and 
helpful to investors, and are not requiring it in the final 
instructions.\339\ Accordingly, we are revising the instructions to 
require firms to address whether or not they make available or offer 
advice only with respect to proprietary products or a limited menu of 
products or types of investments, and if so, to describe such 
limitations.\340\ We believe that the final instructions address the 
same types of limitations on investments that the proposed instructions 
sought to address, but in a less prescriptive way, and allow firms to 
describe their investment offerings more accurately to reflect their 
scope of products and services.
---------------------------------------------------------------------------

    \337\ The proposed instructions stated, ``If you significantly 
limit the types of investments available to retail investors in any 
accounts, include the following . . .'' Proposed Items 2.B.4. and 
2.C.4. of Form CRS. In order to give firms more flexibility to 
describe limitations on products or investment types in the context 
of their business models, and to avoid potential confusion with the 
materiality threshold of Regulation Best Interest (which requires 
disclosure of all material facts relating to the type and scope of 
services provided to the retail customer, including any material 
limitations on the securities or investment strategies involving 
securities that may be recommended to the retail customer), we have 
eliminated the word ``significantly'' from the final instructions. 
Regulation Best Interest Release, supra footnote 47.
    \338\ See CFA Letter I; CFA Institute Letter I.
    \339\ See supra footnotes 77-85 and accompanying text.
    \340\ Item 2.C.(iii) of Form CRS.
---------------------------------------------------------------------------

    Account Minimums and Other Requirements. The final instructions 
also include a requirement to explain whether or not the firm has any 
requirements for retail investors to open or maintain an account or 
establish a relationship, such as minimum account

[[Page 33521]]

size or investment amount, which is a change from the proposal.\341\ In 
response to our request for comments on such possible requirements, 
commenters recommended that we include this information in the 
relationship summary.\342\ In addition, a number of commenters 
submitting mock-ups included disclosures on account minimums in their 
forms.\343\
---------------------------------------------------------------------------

    \341\ Item 2.C.(iv) of Form CRS.
    \342\ See, e.g., NASAA Letter (stating that Form CRS should 
include a disclosure, specifying the minimum account size and 
include information on miscellaneous fees different categories of 
investors can expect to pay); see also Cetera Letter I (stating that 
firms should disclose as material conflict of interest whether or 
not they have established standards for the minimum or maximum 
dollar amount of various account types).
    \343\ See, e.g., Primerica Letter; Cetera Letter I.
---------------------------------------------------------------------------

    We agree that this is important for retail investors to understand 
because many firms offer a number of services that are only available 
to investors with higher account balances.\344\ Furthermore, fee 
schedules may be tiered based on account balances.\345\ Investors 
benefit from being aware of and seeing a range of options in the same 
context, as discussed above. We believe investors can use information 
about different account requirements for both current and future 
decision-making purposes. Thus, the final instructions require firms to 
address whether or not they have any requirements for retail investors 
to open or maintain an account or establish a relationship, such as a 
minimum account size or investment amount.
---------------------------------------------------------------------------

    \344\ See, e.g., SIFMA Letter (stating that investment advisory 
services typically require a minimum account balance); ACLI Letter; 
Comment Letter of the National Association of Insurance and 
Financial Advisors (Aug. 2, 2018) (``NAIFA Letter'').
    \345\ See, e.g., Cetera Letter II (mock-up) (explaining tiered 
fee schedule).
---------------------------------------------------------------------------

b. Additional Information
    In a change from the proposal we are requiring firms to provide 
specific references to more detailed information about their services 
that, at a minimum, include the same or equivalent information to that 
required by the Form ADV, Part 2A brochure (Items 4 and 7 of Part 2A or 
Item 4.A and 5 of Part 2A Appendix 1) and Regulation Best Interest, as 
applicable.\346\ Broker-dealers that do not provide recommendations 
subject to Regulation Best Interest (e.g., execution-only broker-
dealers) are not required to prepare more detailed information about 
their services, but to the extent they do, must include references to 
such information in their relationship summaries.\347\ The final 
instructions require firms to use text features to make this additional 
information more noticeable and prominent in relation to other 
discussion text.\348\
---------------------------------------------------------------------------

    \346\ Item 2.C. of Form CRS. See Regulation Best Interest 
Release, supra footnote 47, at Section II.C.1.
    \347\ Item 2.C. of Form CRS. See Regulation Best Interest 
Release, supra footnote 47, at Sections II.A., II.C.1.
    \348\ General Instruction 4.C. to Form CRS. For example, firms 
could use larger or different font; a text box around the heading or 
questions; bolded, italicized, or underlined text; or lines to 
offset the information from other sections.
---------------------------------------------------------------------------

    As with other references to additional information, firms may 
include hyperlinks, mouse-over windows, or other means of facilitating 
access to this additional information and to any additional examples or 
explanations of such services.\349\ This allows firms to summarize 
their services while making available more detailed and fulsome 
information for retail investors, in keeping with the design of the 
relationship summary as a short, succinct disclosure with links to 
additional information, as commenters and investors asked. We believe 
that requiring firms to make retail investors aware of the services 
they offer, at a high level, and where retail investors can obtain more 
detailed information through layered disclosure, will best engage 
retail investors and help them make more informed decisions when 
choosing from among firms, services, or accounts.
---------------------------------------------------------------------------

    \349\ Item 2.C. of Form CRS.
---------------------------------------------------------------------------

c. Conversation Starters
    Firms will include in this section of the relationship summary 
three prescribed conversation starters for retail investors to ask 
their financial professional.\350\ As discussed in Section II.A.4, 
these questions are taken from the Key Questions to Ask section in the 
proposed relationship summary, which a considerable majority of 
investors indicated were helpful.\351\ Broker-dealers and investment 
advisers that are not dual registrants will include, respectively, 
``Given my financial situation, should I choose a brokerage service? 
Why or why not?'' or ``Given my financial situation, should I choose an 
investment advisory service? Why or why not?'' \352\ Dual registrants 
will include ``Given my financial situation, should I choose an 
investment advisory service? Should I choose a brokerage service? 
Should I choose both types of services? Why or why not?'' \353\ These 
questions are largely the same as the first proposed Key Question but 
replace the terms ``brokerage account'' and ``advisory account'' with 
``brokerage service'' and ``investment advisory service,'' 
respectively.\354\ This revision addresses comments that the concept of 
``accounts'' may not align with all firms' business models and may 
cause investor confusion.\355\ In addition, some commenters stated that 
it was inappropriate for the Commission to require firms to describe 
products and services that they do not offer and about which they may 
have limited or no expertise.\356\ Although the proposed instructions 
permitted firms to modify the first Key Question to reflect the type of 
accounts they offer to retail investors, we are replacing it with three 
formulations that are explicitly tailored to firm type in order to 
clarify that firms are obligated to discuss only the services that they 
offer. Finally, we have rephrased the questions as ``Should I choose 
[a/an brokerage/advisory] service? Why or why not?'' rather than ``Why 
should I choose [a/an brokerage/advisory] service?'' to avoid a 
presumption that the relevant service will always be an appropriate 
service for the retail investor. The questions are designed to prompt a 
conversation relevant to the specific retail investor's circumstances.
---------------------------------------------------------------------------

    \350\ Item 2.D. of Form CRS. 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, including 
statements made in response to the relationship summary's 
``conversation starters.'' See supra footnote 98 and accompanying 
text.
    \351\ See supra footnotes 174-178 and accompanying text.
    \352\ Items 2.D.(i) and 2.D.(ii) of Form CRS.
    \353\ Item 2.D.(iii) of Form CRS.
    \354\ Cf. Proposed Item 8.1 of Form CRS (``Given my financial 
situation, why should I choose an advisory account? Why should I 
choose a brokerage account?''). We did not receive specific comments 
on this question, though some commenters included it or a variation 
thereof in their mock-ups. See, e.g., Betterment Letter I; IRI 
Letter.
    \355\ See supra footnote 80 and accompanying text.
    \356\ E.g., ACLI Letter; IAA Letter I.
---------------------------------------------------------------------------

    All firms also will include the questions ``How will you choose 
investments to recommend to me?'' and ``What is your relevant 
experience, including your licenses, education and other 
qualifications? What do those qualifications mean?'' \357\ These 
questions are nearly identical to proposed Key Questions numbers six 
and nine except, again, for the removal of the account concept from 
proposed Key Question number six, and a minor revision to proposed Key 
Question number nine to encourage retail investors to ask a broader 
question regarding the financial professional's

[[Page 33522]]

qualifications.\358\ We believe that answers to these questions will be 
helpful to retail investors as they make their choices. In addition, a 
significant majority of participants from the RAND 2018 survey 
indicated that they would feel comfortable asking any of the Key 
Questions.\359\ Although fewer participants indicated that they would 
feel ``very comfortable'' asking about the financial professional's 
experience and qualifications, compared with the other two 
questions,\360\ we believe that including this question serves as a 
useful reminder both to investors who would feel comfortable and as 
encouragement to those who are hesitant that asking such a question is 
acceptable.
---------------------------------------------------------------------------

    \357\ Items 2.D.(iv) and 2.D.(v) of Form CRS.
    \358\ Proposed Key Question number six asked ``How will you 
choose investments to recommend for my account?'' Proposed Key 
Question number nine asked ``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.'' Proposed Items 8.6 and 8.9 of Form CRS.
    \359\ RAND 2018, supra footnote 13 (finding that at least two-
thirds and up to 85% of survey participants indicated that they 
would be ``somewhat comfortable'' or ``very comfortable'' asking any 
of the Key Questions, including which account to choose and why, how 
investments would be selected for them, and what the financial 
professional's experience and qualifications were); see also 
Betterment Letter I (Hotspex) supra footnote 18 (reporting that 93% 
of survey participants who viewed a version of the sample standalone 
adviser relationship summary in the proposal indicated that they 
were somewhat or very likely to ask the suggested questions.).
    \360\ RAND 2018, supra footnote 13.
---------------------------------------------------------------------------

    Requirements Removed from the Proposed Instructions. The final 
instructions do not include several specific requirements that were 
proposed in this item. First, the proposal would have required firms to 
describe their transaction-based fees and asset-based fees in this 
section, in addition to the more specific fee information required in a 
separate fee section.\361\ We learned from an investor study submitted 
by commenters that dispersing information on the same topic throughout 
several sections of the relationship summary or separating that 
information with an unrelated topic could confuse investors.\362\ This 
illustrated the importance of establishing sufficient context and 
increasing the salience of related information by ensuring that it is 
kept together in the relationship summary. We agree that fee 
information should be provided together, and have eliminated fee 
disclosures from the Relationship and Services section to locate it 
with other fee information in an effort to reduce investor confusion.
---------------------------------------------------------------------------

    \361\ See Proposed Items 2.B.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.'') and 2.C.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.'') 
of Form CRS.
    \362\ See Kleimann I, supra footnote 19 (``[W]hile the Brokerage 
Account was defined as using transaction-based fees and the 
Investment Advisory Account as using asset-based fees in the first 
section, in the Costs and Fees section, the Investment Adviser 
Services column also discusses transaction fees. This 
`contradictory' repetition was confusing to participants.'').
---------------------------------------------------------------------------

    In addition, the final instructions do not require firms to 
describe regular communications with retail investors, including 
frequency and method, as proposed. Comments were mixed on the proposed 
instruction. One commenter expressed the view that proposed Form CRS 
suggested that firms should contact advisory clients by phone or email 
every quarter and disagreed with this implication. The commenter 
recommended that instead of mandating the form or frequency of contact 
with clients, the Commission should continue to give advisory clients 
flexibility to communicate how and when they want, as long as 
investment advisers are meeting their obligations under the Advisers 
Act.\363\ Another commenter noted that misunderstandings concerning 
broker-dealers' duty or intention to monitor accounts can be avoided by 
proper communications, most importantly at the time the relationship is 
formed.\364\ Mock-ups submitted by commenters generally did not refer 
to or describe communications between the firm or financial adviser and 
the investor.\365\ The proposal was not designed to mandate the form or 
frequency of contact with clients. Nonetheless, given these mixed 
responses, our goal of keeping the relationship summary focused on a 
limited amount of information, and to allow more flexibility for firms 
to describe their services more accurately and meaningfully, firms will 
not be required to describe the frequency and method of their regular 
communications with retail investors. Firms may include this 
information, however, to help investors better understand the services 
provided.
---------------------------------------------------------------------------

    \363\ See Edward Jones Letter.
    \364\ See Schnase Letter.
    \365\ But see Cetera Letter II (``Regardless of the program 
chosen, your IAR is responsible for ongoing review of your 
account(s), regular communication with you . . . .'').
---------------------------------------------------------------------------

3. Summary of Fees, Costs, Conflicts, and Standard of Conduct
    In response to comments, feedback from investors at roundtables and 
on Feedback Forms, and observations reported by the RAND 2018 report 
and other surveys and studies, we are adopting changes to the 
relationship summary's required discussion of fees, costs, conflicts of 
interest, and standard of conduct. Commenters generally supported the 
Commission's goal of providing investors with reliable and 
straightforward information about the fees they pay, the standard of 
conduct applicable to financial professionals, and conflicts of 
interest relating to financial professional compensation.\366\ Some 
suggested that the fee disclosure should be more prominent in the 
proposed relationship summary and located towards the front of the 
relationship summary and also suggested modifications to sections of 
the relationship summary addressing financial professional conflicts of 
interest and standards of conduct.\367\
---------------------------------------------------------------------------

    \366\ See, e.g., CFA Institute Letter I (noting that ``we 
support efforts to help retail investors educate themselves on the 
differences between broker-dealers and investment advisers--in terms 
of services offered, fees they charge, conflicts of interest, and 
importantly, the standard of care under which each operates''); 
Fidelity Letter (``Form CRS should . . . inform investors of the 
types of fees they may incur and direct them, via a link, to more 
detailed disclosure.''); Comment Letter of the Investment Adviser 
Association (Dec. 4, 2018) (``IAA Letter II'') (describing ``fees 
and expenses to be paid, legal obligations, conflicts of interest'' 
as disclosure items that are ``more critical than others''); Comment 
Letter of the University of Miami School of Law (Aug. 2, 2018) 
(``Investors should be provided with clear and concise information 
that fully and fairly discloses the specific charges he or she will 
incur as a result of the particular recommendation.''); NAIFA Letter 
(agrees that clients should receive ``early in the client-advisor 
relationship--all of the information in the SEC's proposal'' which 
would include: ``fees and charges . . . material conflicts of 
interest associated with a recommendation (to the extent known at 
the time of disclosure); [and] standards of conduct applicable to 
the services offered''); see also AARP Letter (recommending 
reformatting of Form CRS to meet ``critical core components'' 
including that ``standard of care should be clear, concise and 
defined'' [and] ``fee structure should be straightforward and avoid 
technical jargon''); CCMC Letter (in connection with investor 
polling, noting that investors identify explaining ``fees and 
costs,'' ``own compensation,'' and ``conflicts of interest'' as 
``issues that matter most'' to investors).
    \367\ See, e.g., mock-ups in IAA Letter I; Robinson Letter; 
SIFMA Letter; Fidelity Letter; Schwab Letter I.
---------------------------------------------------------------------------

    Results of the RAND 2018 report and other surveys and studies 
showed that investors view information about fees and costs as one of 
the most important of the proposed sections of the relationship 
summary.\368\ Investor

[[Page 33523]]

feedback at roundtables and through Feedback Forms also showed the 
importance of fees and cost information to investors.\369\ However, the 
RAND 2018 survey and other surveys and studies also indicated that the 
proposed relationship summary presentation of fee and cost information 
could be difficult for investors to understand.\370\ The RAND 2018 
survey and other surveys and studies also suggested that investors 
found sections in the proposed relationship summary covering the 
obligations of financial professionals and conflicts disclosure less 
informative,\371\ and indicated that investors could have difficulty 
understanding and synthesizing information about the obligations of 
financial professionals and the impact of conflicts of interest.\372\ 
As discussed more fully below, we considered all of this feedback, as 
well as comments received, in redesigning the disclosures related to 
the topics.
---------------------------------------------------------------------------

    \368\ RAND 2018, supra footnote 13 (more than 70% of survey 
respondents selected the fees and costs section as one of the most 
informative; this section was least likely to be selected as not 
informative); see also Cetera II Letter (Woelfel) supra footnote 17 
(reporting that 88% of survey respondents agreed that it is very or 
somewhat important to cover ``fees and costs associated with those 
services''); Schwab Letter I (Koski) supra footnote 21 (reporting 
that 63% of survey respondents ranked ``costs I pay for investment 
advice'' as one of the four most important things for firms to 
communicate); CCMC Letter (investor polling) supra footnote 
21(describing ``explaining fees and costs'' as one of three issues 
that ``matter most'' to investors).
    \369\ See, e.g., Houston Roundtable; Atlanta Roundtable; 
Philadelphia Roundtable; Miami Roundtable; Washington, DC 
Roundtable; Denver Roundtable; Baltimore Roundtable; CFA Letter I; 
see also Feedback Forms Comment Summary, supra footnote 11 
(responses to Question 2(c)) (over 80% of commenters graded the 
section on fees and costs as ``very useful'' or ``useful'').
    \370\ RAND 2018, supra footnote 13 (40% of survey respondents 
rated fees and costs section difficulty as ``just right'' while 35% 
rated the fees and cost section as difficult or very difficult; in 
qualitative interviews, participants generally found the section to 
be important, but also overwhelming and had trouble with language); 
see also Kleimann I, supra footnote 19 (``Participants expected to 
pay for transactions in a Brokerage Account or the quarterly fee for 
an Advisory Account, but they were surprised by the proliferation of 
additional fees . . . commented on the introduction of many new 
terms and wanted definitions. . .''); Cetera Letter II (Woelfel) 
supra footnote 17 (78% of survey respondents agreed strongly or 
somewhat agreed that fees and costs were clearly described, well 
below ratings for clarity of information about services and 
obligations).
    \371\ See RAND 2018, supra footnote 13 (almost one quarter of 
survey respondents selected ``our obligations to you'' as one of the 
least informative sections, only one third selected the section as 
one of the two most informative; the conflicts of interest section 
was selected as one of the two most informative by only 15% of 
respondents and as one of the least informative by more than a 
third); see also Cetera Letter II (Woelfel), supra footnote 17 
(largest percent of survey respondents (88%) strongly or somewhat 
agreed that the ``our obligations to you'' topic was important; 
smallest percent (81%) strongly or somewhat agreed that conflicts of 
interest was important); CCMC Letter (investor polling) supra 
footnote 21(describing ``explaining fees and costs,'' ``explaining 
own compensation,'' and ``explaining conflicts of interest'' as 
three issues that ``matter most'' to investors).
    \372\ See RAND 2018, supra footnote 13 (in qualitative 
interviews, some participants struggled with understanding differing 
obligations for different account types and reconciling information 
in the conflicts of interest section with the ``our obligations to 
you'' section); Kleimann I, supra footnote 19 (``Few participants 
could define ``fiduciary standard''; participants explaining firms' 
financial relationships that could create potential conflicts ``had 
difficulty explaining how firms earned money from these 
relationships . . . often absent from these explanations was a 
discussion of the negative impact that these practices would have on 
them.''); Betterment Letter I (Hotspex), supra footnote 18 
(reporting survey results indicating that some investors viewing a 
version of the sample proposed standalone adviser relationship 
summary had difficulty answering correctly questions about financial 
professional obligations and conflicts of interest).
---------------------------------------------------------------------------

    A new Item 3 will require the relationship summary to cover three 
areas: (i) Fees and costs; (ii) standard of conduct and conflicts of 
interest; and (iii) financial professional compensation and related 
conflicts of interest. Some of the key elements of these disclosures 
include:
     Integrated sections covering fees, costs, conflicts of 
interest, and standard of conduct. We have modified the proposal by 
combining the fees and costs section and the sections discussing 
conflicts of interest and standard of conduct into one Item 3 that will 
require three consecutive sections. These sections will help illustrate 
the interconnectedness of fees, costs, conflicts, and standard of 
conduct, and will keep these related disclosures close in proximity to 
each other.
     Distinct summaries of principal fees and costs other fees 
and costs, and other ways the firm makes money. We are also requiring 
separate sections discussing certain fees and costs, with one section 
discussing principal fees and costs, another section discussing other 
fees and costs related to the firm's services and investments, and 
another section discussing other ways the firm and its affiliates make 
money. We are not requiring firms to discuss all of the fees and costs 
together as proposed, to address comments and feedback that the section 
was complicated and overwhelming. We are also requiring a firm to 
include cross-references to more detailed information about the firm's 
fees.
     A description of the standard of conduct with conflicts. 
We are placing the description of the standard of conduct under the 
same heading as a summary of conflicts in order to help retail 
investors better understand the relationship between the standard of 
conduct and conflicts.
     Broadening the types of conflicts disclosure. We are 
requiring firms to disclose information on the topics that were 
required in the proposal--i.e., proprietary products, third-party 
payments (shelf space and revenue sharing arrangements), and principal 
trading. But we are requiring firms without these conflicts to disclose 
at least one material conflict. We are also requiring a firm to include 
cross-references to more detailed information about the firm's 
conflicts of interest.
     Financial professional compensation. We are adding a 
separate section that will require a firm to highlight how its 
financial professionals are compensated and the conflicts of interest 
those payments create. This disclosure will distinguish firm-level from 
financial professional-level conflicts.
    The proposal would have included one section summarizing fees and 
costs, one section summarizing conflicts of interest, and one section 
discussing the applicable standards of conduct. The principal fees were 
also discussed at the beginning of the services section, and for 
standalone investment advisers and broker-dealers, the section 
discussing fees and costs and the section discussing conflicts of 
interest were separated by a section discussing comparisons between 
investment advisers and broker-dealers. Commenters suggested locating 
fee and conflict disclosures more closely together, and several sample 
relationship summaries submitted by commenters placed the fees and 
conflicts sections in close proximity to each other.\373\ As noted, we 
learned from an interview-based study submitted by a commenter that 
investors could have trouble connecting related information when those 
sections were not closely located.\374\ Observations in the RAND 2018 
qualitative interviews and comments submitted on Feedback Forms also 
suggested that investors' level of understanding varied significantly 
with regard to the relationship between the applicable standard of 
conduct and conflicts, and that investors might be more confused by 
this relationship when the relationship summary placed these sections 
far apart from one

[[Page 33524]]

another.\375\ We agree that it is important to illustrate the 
relationship between fees, conflicts, and standards of conduct. We are 
therefore combining in Item 3 of the final instructions the discussions 
on fees and costs with discussions of firms' conflicts of interest, and 
combining the standard of conduct discussion with the discussion of 
certain other conflicts of interest.
---------------------------------------------------------------------------

    \373\ See, e.g., LPL Financial Letter; Betterment Letter I; 
Primerica Letter; SIFMA Letter; Wells Fargo Letter; Schwab Letter I.
    \374\ See supra footnote 362 and accompanying text.
    \375\ See RAND 2018, supra footnote 13 (in qualitative 
interviews, participants struggled to reconcile information in the 
conflicts of interest section with obligations section). Among 
commenters on Feedback Forms who indicated that the relationship 
summary was too technical or that topics could be improved, many 
commented that sections addressing fees and costs, obligations and 
conflicts of interest needed clarification or better explanation. 
See Feedback Forms Comment Summary, supra footnote 11 (summary of 
responses to Question 4). Some Feedback Form commenters suggested 
changes to the order of information about fees, conflicts and 
obligations or offered other comments suggesting that the order of 
the topics was confusing. See Anonymous28 Feedback Form (``Conflicts 
of Interest should come right after Obligations to You.''); Asen 
Feedback Form (``Somewhat I would prefer to see conflicts before 
fees''); Lee2 Feedback Form (comment responding to Question 3(b), 
whether order is appropriate, ``[c]onflicts seems buried too 
deeply''); Smith1 Feedback Form (``The transactions comment in the 
fees section seems like it would also fall under the conflicts of 
interst [sic] section'').
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a. Description of Principal Fees and Costs and Other Fees
    Similar to the proposal, firms will be required to summarize the 
principal fees and costs that retail investors incur with respect to 
their brokerage and investment advisory accounts, and the conflicts of 
interest they create.
    As noted above, commenters generally supported the Commission's 
goal of providing investors with reliable and straightforward 
information about the fees they pay and suggested making this 
information more prominent and located towards the front of the 
relationship summary.\376\ Similarly, observations in the RAND 2018 
report, and other surveys and studies, and comments from investors at 
roundtables and in Feedback Forms, overwhelmingly supported including 
fee disclosure in the relationship summary and showed that investors 
believe that information about fees and costs is important to 
understanding their relationship with a financial professional.\377\ 
The RAND 2018 survey reported, however, that survey participants were 
more likely to rate the proposed relationship summary section on fees 
and costs as ``difficult'' or ``very difficult'' to understand and 
would add more detail.\378\ In the RAND 2018 qualitative interviews, 
participants generally understood that this section would provide 
information on the types of fees they could possibly pay, but also 
found the section overwhelming with the number of various types of fees 
and had some difficulty with language, including certain terms.\379\ 
Some participants also did not appear to synthesize information about 
fees and conflicts of interest to be able to apply it.\380\ Other 
surveys and studies, and comments provided on Feedback Forms, also 
indicate that investors both want additional information about fees and 
costs and found this information difficult to understand.\381\ Several 
commenters also said that information on fees and costs was not 
straightforward and used too much technical jargon.\382\ In addition, 
the IAC recommended that the Commission adopt a uniform, plain English 
document that covers basic information about fees and compensation, 
among other topics.\383\ The Feedback Form commenters and observations 
reported in the RAND 2018 report and other surveys and studies 
reaffirms our view that it is critical for retail investors to better 
understand the fees and costs incurred with their investments and 
related conflicts of interest. This section has been revised to further 
our policy objective of helping investors better understand such fees, 
costs, and conflicts of interest.
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    \376\ See supra footnotes 366-367 and accompanying text.
    \377\ See supra footnotes 368-369 and accompanying text.
    \378\ See RAND 2018, supra footnote 13 (in the RAND 2018 survey 
about 40% rated the difficulty of the section on fees and costs as 
``just right'' and 35% rated the section on fees and costs as 
``difficult'' or ``very difficult''; about 30% of survey respondents 
suggested adding more detail).
    \379\ See RAND 2018, supra footnote 13 (``Participants struggled 
with terms in this section. . . . Words that participants flagged 
include `markup,' `markdown,' `load,' `surrender charges,' `wrap 
fee' and `custody.' '').
    \380\ See RAND 2018, supra footnote 13 (``[O]ne participant 
could clearly put differences in fees related to each type of 
account [but] when asked about which type of financial professional 
has an incentive to encourage investors to buy and sell securities 
frequently . . . incorrectly answered.'').
    \381\ See Kleimann I, supra footnote 19 (finding that 
``[p]articipants expected to pay for transactions in a Brokerage 
Account or the quarterly fee for an Advisory Account, but they were 
surprised by the proliferation of additional fees. . . . 
Participants also commented on the introduction of many new terms); 
Cetera Letter II (Woelfel) supra footnote 17 (78% of survey 
respondents strongly or somewhat agreed that information on fees and 
costs was clearly presented, rating below sections describing the 
firm's obligations and the services that the firm provides.); 
Feedback Forms Comment Summary, supra footnote 11 (summary of 
responses to Question 4) (41 commenters on Feedback Forms (44%) 
indicated that one or more topics on the relationship summary is too 
technical or could be improved; 23 included comments indicating that 
information about fees and costs is too technical or needed to be 
more clear).
    \382\ See e.g., IAA Letter I (stating that retail investors are 
unlikely to understand the use of ``technical terms and industry 
jargon'' with respect to fees in the relationship summary); see also 
AARP Letter; Fidelity Letter.
    \383\ See IAC Broker-Dealer Fiduciary Duty Recommendations, 
supra footnote 10.
---------------------------------------------------------------------------

    Description of Principal Fees and Costs. First, using the heading 
``What fees will I pay?'',\384\ firms will summarize their principal 
fees and costs that retail investors will incur for brokerage or 
investment advisory services, including how frequently such fees are 
assessed and the conflicts of interest they create.\385\ Broker-dealers 
must describe their transaction-based fees \386\ and investment 
advisers must describe their ongoing asset-based fees, fixed fees, wrap 
fee program fees, or other direct fee arrangements.\387\ The fees 
described by investment advisers should align with the type of fee(s) 
disclosed in response to Form ADV Part 1A, Item 5.E, but they should be 
summarized in a way that provides retail investors a high-level 
overview.\388\
---------------------------------------------------------------------------

    \384\ Item 3.A. of Form CRS.
    \385\ Item 3.A.(i) of Form CRS.
    \386\ Item 3A.(i)(a) of Form CRS.
    \387\ Item 3.A.(i)(b) of Form CRS.
    \388\ Item 3.A.(i)(b) of Form CRS. In addition, investment 
advisers must include information about each type of fee they report 
in Form ADV that is responsive to Item 3.A. of Form CRS.
---------------------------------------------------------------------------

    Although the proposal required firms to include information about 
their principal fees and costs, much of the wording was prescribed. For 
instance, the proposed instructions included prescribed wording to 
describe transaction-based fees and asset-based fees and the incentives 
that each of those fees create.\389\ The proposed instructions also 
required firms to use technical terms and explain their definitions 
(e.g., ``mark-up'' or ``mark-

[[Page 33525]]

down,'' ``load,'' and ``custody'').\390\ Additionally, firms providing 
advice about investing in wrap fee programs were required to include 
several more prescribed sentences.\391\ Finally, dual registrants were 
required to state when a retail investor may prefer a brokerage or 
investment advisory service from a cost perspective,\392\ and wrap fee 
program providers had to explain when a retail investor may prefer a 
wrap fee program.\393\ Commenters argued that in many cases the 
prescribed wording was confusing and not accurate.\394\ For example, 
several commenters indicated the proposed fee discussion was 
unnecessarily technical and suggested the relationship summary avoid 
the use of jargon (e.g., terms like ``asset-based fee'' and ``load'') 
in this section.\395\ Several roundtable participants also said that 
they did not understand these terms,\396\ as did some participants in 
investor studies and surveys.\397\ Other commenters noted that the 
wording in the proposal was too binary.\398\ Another commenter argued 
that certain prescribed wording was obvious to retail investors and did 
not add value to the retail investor.\399\
---------------------------------------------------------------------------

    \389\ Dual registrant broker-dealers, for example, were required 
to include the following wording on 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.'' Proposed Item 
4.B.1. of Form CRS. Dual registrant investment advisers were 
required to include the following wording on 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.'' If the 
asset manager charged another type of fee instead of an asset-based 
fee, it was required to briefly describe that fee and how frequently 
it was assessed. Investment advisers that charged an ongoing asset-
based fee would have been required to 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.'' Broker-dealers would have been 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.'' Proposed Items 4.B.5. and 4.C.8. of 
Form CRS.
    \390\ Broker-dealers were required to state 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.'' Proposed Item 4.B.2.(a) of Form CRS. Investment 
advisers were required to state, if applicable, that ``a retail 
investor will pay fees to a broker-dealer or bank that will hold the 
retail assets and that this is called custody.'' Proposed Item 
4.C.6. of Form CRS.
    \391\ Investment advisers that provided advice to retail 
investors about investing in wrap fee programs were required to 
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 the investment adviser offered a wrap fee program as well 
as another type of advisory account, it was required to include: 
``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.''
    \392\ Dual registrants were required to 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.'' Proposed Item 
4.C.10. of Form CRS.
    \393\ Investment advisers that provided advice to retail 
investors about investing in wrap fee programs were required to 
include the following (emphasis required): ``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.'' Proposed Item 4.C.10. of Form CRS.
    \394\ See, e.g., CFA Institute Letter I (suggesting that the 
Commission revise the proposed wording to reflect the effect on 
costs in a more even-handed manner); ACLI Letter (stating that the 
prescriptive nature of the disclosures does not sufficiently allow 
for diverse business models to be explained); IAA Letter I (stating 
that the prescribed language comparing investment advisers to 
broker-dealers does not include important information and may 
confuse retail investors, and that the prescribed language 
associated with fees based on assets under management, while 
technically correct, misses an important point--namely that an 
adviser earns more when the client's portfolio performs better and 
earns less when the portfolio performs less well aligns the 
adviser's interest with the client's interest, rather than the 
reverse); FSI Letter I (stating that prescribing language in the 
relationship summary may confuse retail investors); Comment Letter 
of Paul Hynes (Jul. 31, 2018) (``Paul Hynes Letter'') (stating that 
the prescribed wording is inaccurate by suggesting that investment 
advisers can sell variable annuities); ACLI Letter (stating that the 
Fees and Costs section is replete with required statements that may 
be unnecessary/misleading).
    \395\ CFA Letter I; AARP Letter; IAA Letter I.
    \396\ See, e.g., Miami Roundtable; Houston Roundtable; 
Philadelphia Roundtable.
    \397\ See RAND 2018, supra footnote 13 (in qualitative 
interviews participants asked for definitions of ``transaction-based 
fee,'' asset-based fee,'' and struggled with terms such as ``mark-
up,'' ``mark-down,'' ``load,'' surrender ``charges'' and ``wrap 
fee''); see also Kleimann I, supra footnote 19.
    \398\ See, e.g., CFA Letter I; Margolis Feedback Form (stating 
that the wording assumed that a retail investor would pay either a 
transaction-based fee or an asset-based fee for a brokerage or 
advisory account, respectively, and did not capture other fee 
structures).
    \399\ See Wells Fargo Letter.
---------------------------------------------------------------------------

    In an effort to balance the goal of educating retail investors with 
the need to provide firms with enough flexibility to tailor the 
disclosure to their services and investments, we have decided to remove 
from the Instructions the prescribed wording we proposed about fees and 
costs.\400\ Specifically we are replacing the prescribed wording with a 
requirement to describe the firm's principal fees and the conflicts of 
interest they create. We have also included examples in the 
instructions of statements that would describe certain principal fees. 
We have concluded, based on consideration of the comments and investor 
feedback, that the proposed requirements did not reflect the fees for 
all firms and, depending on firms' business models, could be confusing. 
Instead the relationship summary will focus on a high level summary of 
fees. Having considered comments, we believe this more flexible 
approach will better facilitate meaningful disclosure in the 
relationship summary, as well as conversations between the retail 
investor and his or her financial professional, and help the retail 
investor decide on the types of services that are right for him or her. 
Additionally, we believe that certain definitions and concepts 
explained in the proposed relationship summary can be better explained 
in other ways, such as through layered disclosure that explain 
technical terms as appropriate for the specific firm (e.g., 
``hovers'').\401\ Further, requiring firms to draft their own 
descriptions will allow them to tailor the description to their 
particular business models, including the fees their prospective 
customers and clients will most commonly incur, which will make the 
discussion more accurate and relevant and further help facilitate 
retail investors' comprehension.
---------------------------------------------------------------------------

    \400\ As discussed further below, we are not eliminating all 
prescribed wording for this section and are requiring firms to 
include the following statement: ``You will pay fees and costs 
whether you make or lose money on your investments. Fees and costs 
will reduce any amount of money you make on your investments over 
time. Please make sure you understand what fees and costs you are 
paying.''.
    \401\ Firms are also encouraged to fully explain any technical 
terms that they use to describe their fees. We also believe that 
Investor.gov can be a resource for this information, and the 
relationship summary will highlight Investor.gov/CRS where 
educational material is available.
---------------------------------------------------------------------------

    In addition, we are not including the proposed prescribed wording 
with respect to wrap fee programs.\402\ Instead, investment advisers 
that offer these services to retail investors should include disclosure 
about the relevant fees and conflicts of interest, and explain the 
program. We are including instructions encouraging investment advisers 
with wrap fee programs to explain that asset-based fees associated with 
the wrap fee program will include most transaction costs and fees to a 
broker-dealer or bank that has custody of these assets, and therefore 
are higher than a typical asset-based advisory fee.\403\
---------------------------------------------------------------------------

    \402\ The proposal required certain prescribed wording 
describing wrap fee programs. See Proposed Item 4.C.3. of Form CRS.
    \403\ Item 3.A.(i)(b) of Form CRS.
---------------------------------------------------------------------------

    We also removed the proposed disclosures about which type of 
service or account is better for a retail investor. Specifically, the 
proposal would have required firms to include prescribed wording about 
when a retail investor may prefer paying a transaction-based fee or an 
asset-based fee.\404\ Although

[[Page 33526]]

some commenters did not object to the proposed prescribed wording and 
some included it in their mock-ups,\405\ several commenters raised 
concerns.\406\ For example, one commenter argued that the required 
wording could be false and misleading, noting that the required 
statements do not take into account that transaction-based fees are not 
necessarily more affordable for buy-and-hold investors who do not trade 
often, many broker-dealers offer higher-cost investment products (e.g., 
variable annuities, non-traded REITs, and private placements), and many 
investment advisers recommend investments with lower operating expenses 
than those sold by brokers.\407\ We have concluded that the proposed 
required wording did not capture all of the information that, in 
certain circumstances, would be necessary to help retail investors 
reasonably assess whether a particular service and its associated fees 
will be better for them. Instead, the relationship summary provides 
information about what the firm offers and encourages discussion with 
conversation starters. Such a discussion--facilitated by Form CRS--is 
more appropriate between the financial professional and the retail 
investor about the firm's specific offerings and associated fees and 
conflicts, and the retail investor's specific circumstances.
---------------------------------------------------------------------------

    \404\ The proposal required standalone investment advisers and 
standalone broker-dealers to state that a retail investor may prefer 
paying ``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.'' or ``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.'' 
Proposed Items 5.A.4. and 5.B.6. of Form CRS. Dual registrant 
broker-dealers were required to 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.'' Proposed Item 4.B.6. of Form CRS. Dual registrant 
investment advisers that charged an ongoing asset-based fee were 
required to 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.'' Proposed Item 4.C.10. of Form CRS.
    \405\ See, e.g., LPL Financial Letter; Betterment Letter I; IRI 
Letter.
    \406\ See supra footnote 394.
    \407\ See CFA Letter I.
---------------------------------------------------------------------------

    The proposal also required firms to state whether their fees vary 
and are negotiable and to describe the key factors that would help a 
reasonable retail investor understand the fee that he or she is likely 
to pay for services.\408\ In the RAND 2018 qualitative interviews, some 
participants were confused by the statement about fees being negotiable 
and most mock-ups commenters submitted did not include this 
disclosure.\409\ We did not include this requirement in the final 
instruction. It is important to instead focus the relationship summary 
on information about fees that retail investors identified as important 
to their assessment of firms. Given the comments and investor testing 
results showing that the fee section was technical and difficult to 
understand, we believe that the final instructions will help investors 
focus on the information the final instructions do require. We believe 
that removing information about negotiability should help achieve this 
objective.
---------------------------------------------------------------------------

    \408\ Proposed Items 4.B.3. and 4.C.5 of Form CRS. The 
instructions included examples of such key factors (for a broker-
dealer, this may be 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 a firm; for an investment 
adviser, this may include the services the retail investor receives 
and the amount of assets in the retail investor's account). 
Investment advisers were also required to state that a retail 
investor could be required to pay fees when certain investments are 
sold (e.g., surrender charges for selling variable annuities).
    \409\ See RAND 2018, supra footnote 13 (noting that the phrase 
stating that fees are negotiable and may vary concerned 
participants, and many noted that it made them feel as if they pay 
too much). Similarly, see Anonymous28 Feedback Form (``If fees are 
negotiable, when is this done?''); see also mock-ups in IAA Letter 
I; Robinson Letter; Primerica Letter; LPL Financial Letter, SIFMA 
Letter; Schwab Letter I; Fidelity Letter.
---------------------------------------------------------------------------

    In another modification from the proposal, we are requiring firms 
to discuss the conflicts of interest created by their principal fees 
and costs rather than prescribing specific wording about those 
conflicts. We are making this change in response to commenters, who 
pointed out that the conflicts of interest created by principal fees 
can vary in more ways than our prescribed wording contemplated.\410\ 
Instead of prescribed wording, the final instructions include a 
requirement that firms explain the conflict of interest their principal 
fees create, as well as examples of how a firm may communicate certain 
conflicts of interest. These examples are the same conflicts the 
proposed instructions required. For instance, a broker-dealer could 
disclose its conflicts of interest related to transaction-based fees by 
stating that a retail investor would be charged more when there are 
more trades in his or her account and that the firm may therefore have 
an incentive to encourage a retail investor to trade often.\411\ 
Investment advisers that charge an asset-based fee could disclose 
related conflicts of interest by stating that the more assets in a 
retail investor's advisory account, the more the retail investor will 
pay in fees, and the firm may therefore have an incentive to encourage 
the retail investor to increase the assets in his or her account.\412\ 
Firms that offer variable annuity and variable life insurance products 
could disclose that they have a financial incentive to offer a contract 
that includes optional benefit features, which may entail additional 
fees on top of the base fee associated with the contract, that they may 
encourage contract owners to select investment options with relatively 
higher fees, or that they may offer the contract owner a new contract 
in place of the one that he or she already owns. Finally, we also have 
included a note in the final instructions that an investment adviser 
receiving compensation in connection with the purchase or sale of 
securities should consider the applicability of the broker-dealer 
registration requirements of the Exchange Act and any applicable state 
securities statutes.\413\
---------------------------------------------------------------------------

    \410\ See, e.g., Comment Letter of Invesco Advisers, Inc. (Aug. 
7, 2018) (``Invesco Letter''); Committee of Annuity Insurers Letter; 
IAA Letter I; see also CFA Institute Letter I (noting that investors 
``will most likely focus on the fees and costs discussion and should 
be alerted to the fact that in addition to different fee 
arrangements and structures, different practices and conflicts may 
also result in higher costs.'').
    \411\ Item 3.A.(i).a. of Form CRS.
    \412\ Item 3.A.(i).b. of Form CRS.
    \413\ See Item 3.A.(i).b of Form CRS. This statement is 
consistent with Part 2A of Form ADV.
---------------------------------------------------------------------------

    Description of Other Fees and Costs. Firms also will be required to 
describe other fees and costs related to their brokerage and investment 
advisory services and investments, in addition to the firm's principal 
fees and costs, that the retail investor will pay directly or 
indirectly. Firms must list examples of the categories of the most 
common fees and costs that their retail investors will pay directly or 
indirectly.\414\ Those fees and costs may include, for example, 
custodian fees, account maintenance fees, fees related to mutual funds 
and variable annuities, and other transactional fees and product-level 
fees.\415\ With regard to product-level fees, in particular, firms may 
wish to highlight certain fees such as distribution fees, platform 
fees, shareholder servicing fees and sub-transfer agency fees, in order 
to enhance the retail investor's understanding of these fees to the 
extent applicable to the customer's transactions, holdings, and 
accounts.
---------------------------------------------------------------------------

    \414\ Item 3.A.(ii) of Form CRS.
    \415\ Item 3.A.(ii) of Form CRS.
---------------------------------------------------------------------------

    We recognize that the fees and costs that a firm determines to be 
the most common will vary and depend on particular products and 
services the firm offers and the fee arrangements associated with those 
products and services. Generally, in making this determination, firms 
should consider, for example, the amount of the fee (including whether 
the fee varies based on options the investor may select such as 
optional benefits and the investment options that a contract owner may 
select in the context of variable annuities and variable life insurance 
products), the likelihood that the fee will be applicable, whether the 
fee is ordinarily assessed on a significant number of the firm's 
clients, whether the fee is associated with a product or service that 
the firm frequently recommends or provides, whether the fee is 
contingent

[[Page 33527]]

upon certain events the investor should be made aware of, the effect on 
returns, and the magnitude of the conflict of interest it may create. 
For example, an investment adviser should consider discussing 
commissions that are charged when an investment is bought or sold. A 
firm that commonly offers an investment that includes a surrender fee--
for example, a variable annuity or variable life insurance contract is 
sold as a long-term investment that may entail relatively high 
surrender fees--should consider disclosing that a retail investor could 
be required to pay fees when certain investments are sold.
    The proposal similarly required firms to state that retail 
investors will pay other fees in addition to the firm's principal fees. 
Like the final instructions, the proposal required disclosure of the 
other fees related to the services or account such as custodian fees, 
account maintenance fees, and account inactivity fees, and included 
these other fees in the same section discussing the firm's principal 
fees.\416\ The proposal also required that all firms disclose that 
certain investments imposed additional fees, including fees that reduce 
the value of investments over time (e.g., mutual funds and variable 
annuities) and fees paid when an investment is sold (e.g., surrender 
charges for selling variable annuities).\417\ Observations reported 
from RAND 2018 qualitative interviews and another study indicated that 
some investors could become overwhelmed with the number of various 
types of fees and many were surprised that so many different types of 
fees could apply in addition to a firm's principal fee.\418\ At the 
same time, investors participating in surveys and studies and investors 
providing comments on Feedback Forms have indicated that more 
information would be helpful.\419\ Industry commenters, commenters 
representing investors, and commenters on Feedback Forms, and 
roundtable participants supported some disclosure regarding product-
level fees, though commenters differed in the level of suggested detail 
on such fees.\420\ For instance, one commenter stated that the 
relationship summary should reveal all fees and commissions for all 
purchases.\421\ Other commenters, however, believed that a link to the 
prospectus should sufficiently satisfy disclosure requirements 
regarding mutual fund fees and expenses.\422\ Another urged the 
Commission to provide a list of examples of transaction-based 
fees.\423\
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    \416\ Proposed Items 4.B.4. and 4.C.6. of Form CRS. 
Specifically, the proposal required broker-dealers to state, if 
applicable, that a retail investor will pay other fees in addition 
to the firm's principal fees, including, but not limited to, 
custodian fees, account maintenance fees and account inactivity 
fees. The proposal required investment advisers to state, if 
applicable, that a retail investor will pay transaction-based fees 
when it buys and sells an investment for the retail investor and 
that retail investors will pay, if applicable, custodian fees, and 
other fees such as those for account maintenance services.
    \417\ Proposed Items 4.B.2.(b) and 4.C.4. of Form CRS.
    \418\ RAND 2018, supra footnote 13 (qualitative interview 
results); Kleimann I, supra footnote 19. Similarly, see Anonymous02 
Feedback Form (``Do companies charge all these fees? Maybe use words 
like `may charge' ''); Anonymous28 Feedback Form (``The section on 
fees might better be presented in a chart--no mention is made of 
front and backend loads.'').
    \419\ See RAND 2018, supra footnote 13 (qualitative interview 
results), Kleimann I, supra footnote 19; Kleimann II, supra footnote 
19 (in study testing investor reaction to alternate design of 
relationship summary, participants continued to focus on additional 
fees and wanted additional information on fees); see also Feedback 
Forms Comment Summary, supra footnote 11 (summary of responses to 
Question 5) (of 48 Feedback Forms with narrative comments suggesting 
additional information to be required in the relationship summary, 
29 suggested that additional information about fees and costs would 
be helpful).
    \420\ See Fidelity Letter; CFA Letter I; see also Anonymous11 
Feedback Form (``. . . disclose specific fees for different types of 
securities''); Caddess Feedback Form (``description of brokers 
buying one `loaded' fund and then selling it soon after to buy a 
more `suitable loaded' fund is not vivid enough.''); Fontaine 
Feedback Form (``More on the mutual fund loads and class shares 
Load''); Malone Feedback Form (``Suggest fees monthly associated 
with each fund by type''); Mennella Feedback Form (``In addition to 
paying a management fee what is the cost of the underlying 
investments such as mutual funds, liquid alternatives, seperately 
[sic] managed accounts, transaction costs, etc.?''); Houston 
Roundtable; Philadelphia Roundtable.
    \421\ Comment Letter of Tony Greiner (Jul. 14, 2018).
    \422\ Comment Letter of Oppenheimer Funds (Aug. 7, 2018) 
(``Oppenheimer Letter''); TIAA Letter.
    \423\ Comment Letter of the Investment Company Institute (Aug. 
7, 2018) (``ICI Letter'').
---------------------------------------------------------------------------

    We agree that understanding these fees is important so that retail 
investors have the necessary information to evaluate between firms, 
firm types (i.e., investment adviser, brokerage, or dually registered), 
and firm services, accounts, and products so that they can select what 
is right for them. We continue to believe drawing retail investors' 
attention to these additional fees is important because they have an 
impact on investors' investment returns over time. Accordingly, we are 
requiring disclosure of these types of fees and listing examples of 
categories as proposed. The final instructions, however, make clear 
that firms can use their own wording, and only require examples of the 
most common fees and costs. As discussed below, firms will be required 
to include cross-references to more specific information, and will be 
permitted to use tools to help investors learn about these fees and 
costs in an interactive way without overwhelming retail investors with 
the additional information. We believe that this approach balances 
providing short, understandable disclosures about additional fees and 
costs with investors' interest in understanding more about fees and 
costs.
    Additional Information. Finally, in a change from the proposal, 
firms will be required to state: ``You will pay fees and costs whether 
you make or lose money on your investments. Fees and costs will reduce 
any amount of money you make on your investment over time. Please make 
sure you understand what fees and costs you are paying.'' \424\ The 
first sentence replaces a statement in the proposal that some 
investments impose additional fees that will reduce the value of the 
retail investor's investment over time. Given the importance of 
assisting investors to understand the impact of fees and costs, we are 
requiring prescribed wording in this instruction. The prescribed 
wording discloses to investors a key term under which a service will be 
offered, namely the fact that the service will not be free and that the 
cost of using the service will exist regardless of investment 
performance.\425\
---------------------------------------------------------------------------

    \424\ Item 3.A.(iii) of Form CRS.
    \425\ See Zauderer v. Office of Disciplinary Counsel, 471 U.S. 
626, 651 (1985) (upholding required disclosure of factual 
information about terms of service, including that clients would 
still be liable to litigation costs even if their lawsuits were 
unsuccessful).
---------------------------------------------------------------------------

    Firms must also include specific cross-references to more detailed 
information about their fees and costs.\426\ The cross-reference must, 
at a minimum, include the same information as, or contain information 
equivalent to that required by, the Form ADV Part 2A brochure 
(specifically Items 5.A., B., C., and D.) and Regulation Best Interest, 
as applicable.\427\ If the firm is a broker-dealer that does not 
provide recommendations subject to Regulation Best Interest, to the 
extent it prepares more detailed information about its fees, it must 
include specific references to such information.\428\ The final 
instructions require firms to use text features to make this additional 
information more noticeable and prominent in relation to other 
discussion text.\429\ Firms may choose to

[[Page 33528]]

provide a hyperlink, or other means of facilitating access, that leads 
directly to the relevant Regulation Best Interest disclosure or section 
of Form ADV, or they may choose to create an additional page that 
contains the same or equivalent information.\430\ For example, a firm 
may decide to include information on a different website.
---------------------------------------------------------------------------

    \426\ Item 3.A.(iii) of Form CRS.
    \427\ Item 3.A.(iii) of Form CRS.
    \428\ Item 3.A.(iii) of Form CRS.
    \429\ General Instruction 4.C to Form CRS. For example, firms 
could use larger or different font; a text box around the heading or 
questions; bolded, italicized, or underlined text; or lines to 
offset the information from other sections.
    \430\ While drafting these disclosures for Form CRS, investment 
advisers also are encouraged to consider whether they can describe 
the information about fees more clearly in the Form ADV brochure in 
a more reader-friendly format. See also General Instructions 3. and 
4. of Form CRS (instructions applicable to electronic delivery). For 
further discussion of these provisions, see supra Section II.A.3. 
and footnotes 156 and 158 and accompanying text, and Section 
II.B.2.(b) and footnotes 348-349.
---------------------------------------------------------------------------

    The proposed instructions did not include a specific cross-
reference to additional fee disclosure, but the proposal required a 
cross-reference in the Additional Information section about where the 
retail investor could find information about the services offered, and 
we requested comment on whether to require firms to include a fee 
schedule.\431\ In the RAND 2018 survey, a potential hyperlink to 
information on fees, however, generated the most interest among survey 
participants.\432\ Some industry commenters suggested that the 
relationship summary should permit hyperlinks to fee schedules, arguing 
that additional information would be helpful for retail investors, but 
that including the fee schedule itself would be unwieldy.\433\ Another 
commenter, however, suggested requiring a fee schedule that includes 
typical breakpoints and information on likely and/or maximum fees.\434\
---------------------------------------------------------------------------

    \431\ Proposed Item 7.E. of Form CRS.
    \432\ See RAND 2018, supra footnote 13 (58% of participants 
selecting ``very likely'' and another 32% selecting ``somewhat 
likely'' to click on a hyperlink relating to fees; no other 
potential hyperlink generated a majority with ``very likely'' usage 
among any investor or education subgroup). Other investor studies 
indicated that participants wanted descriptions of the hyperlinks to 
be more concrete in terms of what information they would find, and 
that, while some participants were interested in additional 
information, others admitted they would not follow the links because 
it was extra effort, they were uninterested, or the link did not 
itself suggest what would be there. See Kleimann II, supra footnote 
19. In addition, numerous commenters supported layered disclosure. 
See supra footnote 31 and accompanying text.
    \433\ See CFA Letter I; IAA Letter I; LPL Financial Letter.
    \434\ See Morningstar Letter.
---------------------------------------------------------------------------

    Given the feedback from investors that fee information is 
important, we believe that requiring specific references to more 
detailed information about fees balances the goals of the relationship 
summary, to highlight information covering several topics, with 
investors' interest in understanding more about fees. This approach 
will give retail investors information about the types of fees at a 
higher level and then offer more details, permitting the relationship 
summary to cover other important topics as well.\435\ Including a fee 
schedule in the relationship summary could make it more difficult to 
also cover the other topics while maintaining short, digestible 
disclosures. Instead, we are not including a fee schedule in the 
relationship summary but are requiring cross references to balance 
providing a shorter document with giving retail investors easy access 
to more detailed information.
---------------------------------------------------------------------------

    \435\ See supra Section II.A.3.
---------------------------------------------------------------------------

    Conversation Starter. We are also adopting a conversation starter 
that is designed to prompt a more personalized discussion regarding the 
fees and costs that will impact the particular retail investor's 
account. A firm must include the following question for the retail 
investor to ask his or her financial professional: ``Help me understand 
how these fees and costs might affect my investments. If I give you 
$10,000 to invest, how much will go to fees and costs, and how much 
will be invested for me?'' \436\
---------------------------------------------------------------------------

    \436\ Item 3.A.(iv) of Form CRS.
---------------------------------------------------------------------------

    As discussed above, the proposal included the following ``Key 
Question,'' which was intended to serve as a conversation starter 
between the retail investor and the financial professional and to 
provide the investor an opportunity to receive a quantitative example 
of the impact of fees: ``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?'' \437\ The Proposing Release discussed the 
option of including an example of the impact of fees in the 
relationship summary, and requested comment on whether we should 
require an example showing how sample fees and charges apply to a 
hypothetical advisory account and a hypothetical brokerage account, as 
applicable.\438\ We also requested comment on what assumptions firms 
should make in preparing such an example and how the information should 
be presented.\439\
---------------------------------------------------------------------------

    \437\ Proposed Item 8 of Form CRS.
    \438\ Proposing Release, supra footnote 5.
    \439\ Proposing Release, supra footnote 5.
---------------------------------------------------------------------------

    Feedback from the RAND 2018 report, other surveys and studies, 
roundtables, and the Feedback Forms showed that retail investors want 
more information about fees and the impact of those fees on their 
investments.\440\ At some of the roundtables, for example, participants 
discussed the utility of adding a hypothetical example in the 
relationship summary to illustrate fees.\441\ Commenters on Feedback 
Forms also asked for more specific information about the impact of fees 
on their investments, such as example fee calculations or ranges of 
fees.\442\ Commenters supported including a question highlighting fees 
a retail investor pays.\443\ Commenters, including commenters 
representing investors and individual investors, also overwhelmingly 
supported requiring

[[Page 33529]]

more information to help retail investors understand the fees and costs 
associated with their investments, particularly specific examples about 
how those fees could affect them.\444\ Several commenters, however, 
objected to the inclusion of the key question addressed above because 
of the operational challenges present in answering such a question with 
respect to a particular retail investor.\445\ Some argued that 
anticipated fees are unknown for broker-dealer customers, while others 
believed that it is too difficult for firms to build out systems for 
individualized fees.\446\ Other commenters suggested eliminating this 
particular key question and instead requiring firms to include links to 
investor education materials prepared by the Commission.\447\ Many 
commenters were concerned that this key question would impose new 
disclosure or recordkeeping requirements.\448\
---------------------------------------------------------------------------

    \440\ See e.g., RAND 2018, supra footnote 13 (noting survey 
results finding that the fees and costs section was ``the section 
for which the largest share of respondents suggest adding more 
detail'' and investors were more likely than non-investors to 
suggest adding more detail to the section on fees and costs (31 
percent versus 25 percent), and in qualitative interviews, 
``participants expressed that this section is overwhelming . . . and 
at the same time felt more information would be helpful.''); 
Feedback Forms Comment Summary, supra footnote 11 (summary of 
responses to Question 5) (narrative answers on 29 Feedback Forms 
indicated that additional information about fees and costs would be 
helpful).
    \441\ See Washington, DC Roundtable (an investor stated that it 
would be useful for comparing understanding costs if hypothetical 
examples were given about how cost affects the investor's returns); 
Atlanta Roundtable (an investor stated that it would be helpful to 
know the cost of investing a hypothetical amount of money); and 
Philadelphia Roundtable (an investor stated that it would be helpful 
to see hypothetical broker and investment adviser fee arrangements 
for a given investment portfolio to aid in determining which 
arrangement may be more appropriate for the investor).
    \442\ See, e.g., Lee1 Feedback Form (``fees should tell me the 
fees I can expect to pay''); Anonymous03 Feedback Form (``Create a 
calculator . . . where the investor fills in the amount and the fees 
for both scenarios are calculated''); Anonymous06 Feedback Form 
(``Provide monetary examples. If you invest $100, then your fees are 
. . .''); Anonymous24 Feedback Form (requesting ``more specific 
examples showing specific costs''); Baker Feedback Form (``Graphic 
and hypothetical examples could be helpful. Mary invests $50,000 
with a broker-dealer and Jane invests $50,000 with an investment 
adviser and present some scenarios with each . . . As fees, 
commissions, etc. may vary and be negotiable, a range of typical, 
usual, main-stream commission charges and asset-based fees would be 
helpful to alert the client to possible overcharges.''); Bhupalam 
Feedback Form (``What would make it better is if it has samples of 
costs in particular with each firm a client is dealing with.''); 
Hawkins Feedback Form (``Including some ranges as to what to expect 
in fees could help. Also, including information as to the impact 
that increased fees have on investment returns, long term, would 
help the average investor.''); Mennella Feedback Form (``I want to 
know what an investment is going to cost me over my time horizon . . 
. .'').
    \443\ See IAA Letter I; LPL Financial Letter; New York Life 
Letter; Primerica Letter; RAND 2018, supra footnote 13 (91% of 
participants indicated they were ``very likely'' or ``somewhat 
likely'' to ask a supplemental question that addressed the amount of 
a $1,000 investment that would go to fees and costs rather than 
being invested for them).
    \444\ See, e.g., CFA Institute Letter I; CFA Letter I; 
Betterment Letter I; Morningstar Letter; John Hancock Letter; 
Comment Letter of Barbara Greenwald (Jul. 12, 2018). See, e.g., 
Anonymous25 Feedback Form (``give examples with numbers, showing 
examples of hypothetical accounts''); Baker Feedback Form (``Graphic 
and hypothetical examples would be helpful''); Coleman Feedback Form 
(``Need simple examples''); Manella Feedback Form (``I want to know 
what an investment is going to cost me over my time horizon''); 
Schreiner Feedback Form (``Provide a hypothetical example with 
industry standard fees . . .''); see also Atlanta Roundtable; 
Houston Roundtable; Washington, DC Roundtable.
    \445\ See supra footnote 189.
    \446\ See NSCP Letter; Edward Jones Letter (noting that given 
the range of services available, it would be very difficult for 
financial professionals to fully address this question at the outset 
of the relationship, particularly for investors selecting 
transaction-based services); TIAA Letter; LPL Financial Letter; 
Primerica Letter; ICI Letter; SIFMA Letter (noting most firms do not 
currently have systems in place to allow financial professionals to 
answer customer-specific questions).
    \447\ See Prudential Letter.
    \448\ See Edward Jones Letter; see also supra Section II.A.4.
---------------------------------------------------------------------------

    Commenters that supported more fee disclosure had a range of 
suggestions as to how to include the additional information. For 
example, one commenter believed that if hypothetical or personal fee 
disclosures are included in the relationship summary, such disclosures 
should focus on helping investors understand the effect expenses have 
on an investment and should make clear that such an example is for 
educational purposes.\449\ One individual advocated for more 
transparent fee information, suggesting the relationship summary 
provide individualized fees or a specific range of fees.\450\ Another 
commenter noted that, in response to a previously commissioned report 
revealing participants' lack of knowledge about fees as well as their 
desire for a better understanding of fees, a general chart or graph 
that depicts the effects of fees on an account would be helpful for 
investors.\451\ Another commenter included a sample mock relationship 
summary with a numerical example of how the fees might impact a 
hypothetical account.\452\
---------------------------------------------------------------------------

    \449\ See Invesco Letter (stating that this could be achieved 
by, for example, a side-by-side bar graph showing the growth of an 
investment gross of costs and net of costs).
    \450\ See Wahh Letter.
    \451\ See AARP Letter.
    \452\ See Betterment Letter I (Hotspex), supra footnote 18 
(noting that investors who viewed a redesigned version of the 
standalone adviser relationship summary appeared to appreciate the 
example of how fees would impact a hypothetical account).
---------------------------------------------------------------------------

    Given the importance of fees, we want to encourage retail investors 
and their financial professionals to have a conversation to further 
discuss the particular fees and costs that would apply to the retail 
investor, and the impact fees and costs could have on the retail 
investor's investment returns over time, in order to promote investor 
understanding. After consideration of the comments received, we are 
adopting a conversation starter that is designed to elicit a more 
personalized discussion regarding the fees and costs that will impact 
the particular retail investor's account, while mitigating the concerns 
regarding the proposed ``Do the math for me'' question posed.\453\ We 
believe that this conversation starter will allow financial 
professionals to tailor the conversation to the particular retail 
investor even if the financial professional does not provide precise 
fee information for that individual during the conversation. For 
instance, if the financial professional intends to recommend mutual 
funds to the retail investor, he or she may choose to discuss firm- and 
product-level fees that may apply. The financial professional should be 
in a position to explain the fees and costs relevant to that particular 
retail investor if the investor chooses a certain type of account and 
certain investment, even if the financial professional provides 
examples and estimated ranges rather than a precise prediction of how 
much the investor will pay. In addition, the financial professional 
should explain how those fees and costs will work (for example, whether 
they are upfront charges, taken out of the initial investment amount, 
taken out over time, future charges, or charged in another manner) and 
how the fees and costs could impact the retail investor's investment 
returns over time. Firms may consider including calculators, charts, 
graphs, tables, or other graphics or text features to enhance an 
investor's understanding of these fees. Firms may also consider 
reviewing with their retail investors the impact of fees on the retail 
investor's account on a periodic basis.\454\
---------------------------------------------------------------------------

    \453\ See supra Section II.A.4.
    \454\ See Regulation Best Interest Release, supra footnote 47, 
at Section II.C.1.a.
---------------------------------------------------------------------------

    While we agree that examples are important to illustrate the 
potential impact of fees, we decline to require firms to provide a 
hypothetical example in the relationship summary.\455\ Our intent with 
the proposed ``Do the math for me'' question was that it serve as a 
conversation starter and a prompt to encourage the retail investor to 
ask about the amount she would typically pay per year for the account, 
what would make the fees more or less, and what was included in those 
fees.\456\ We believe that the conversation starter that is being 
adopted here is consistent with the proposal's intent to prompt retail 
investors to have a conversation with their financial professional 
about fees that may impact their investments and account while also 
addressing the concerns raised by commenters. We encourage firms to 
consider ways to provide more personalized disclosures to retail 
investors, and we will continue to consider whether to require more 
personalized fee disclosure, particularly as operational and 
technological costs fall.
---------------------------------------------------------------------------

    \455\ See infra Section IV.D.4 (Alternatives to the Relationship 
Summary) for a discussion on the inclusion of a hypothetical fee 
example.
    \456\ Proposing Release, supra footnote 5.
---------------------------------------------------------------------------

b. Other Ways of Making Money, Standard of Conduct, and Conflicts of 
Interest
    Firms will be required to include disclosure under a single heading 
describing their standard of conduct and a summary of certain firm-
level conflicts, including the specific conflicts the proposal 
required.\457\ The proposal required disclosure on both conflicts and 
the standard of conduct, but in separate sections. The final 
relationship summary requires discussion in one section of other firm-
level revenues and conflicts of interest,

[[Page 33530]]

and the applicable standard of conduct.\458\
---------------------------------------------------------------------------

    \457\ Item 3.B. of Form CRS. For broker-dealers, the heading 
will state ``What are your legal obligations to me when providing 
recommendations? How else does your firm make money and what 
conflicts of interest do you have?''; for investment advisers, the 
heading will state ``What are your legal obligations to me when 
acting as my investment adviser? How else does your firm make money 
and what conflicts of interest do you have?''; and for dual 
registrants that prepare a single relationship summary, the heading 
will state ``What are your legal obligations to me when providing 
recommendations as my broker-dealer or when acting as my investment 
adviser? How else does your firm make money and what conflicts of 
interest do you have?''.
    \458\ Id.
---------------------------------------------------------------------------

    We are placing these disclosures together, including the related 
conversation starter, because we believe they will more effectively 
allow retail investors to understand the standards of conduct for 
broker-dealers and investment advisers.\459\ We are also modifying the 
requirements for the standard of conduct and conflict of interest 
disclosures, as discussed in more detail below.
---------------------------------------------------------------------------

    \459\ In addition, retail investors may learn more about 
investment advisers, broker-dealers, and investing at Investor.gov/CRS, which will be referenced in a relationship summary's 
introduction. See Instruction to Item 1.B. of Form CRS.
---------------------------------------------------------------------------

    We continue to believe it is important to highlight the presence of 
conflicts and their interconnectedness with how the firm makes money. 
We recognize that investment advisers, broker-dealers, and their 
financial professionals have conflicts that affect their retail 
investor clients and customers and believe it is important to 
underscore this for retail investors.\460\ Similarly, we continue to 
believe that it is important to provide retail investors with 
disclosure regarding a broker-dealer or investment adviser's legal 
obligations regarding the required standard of conduct in a way that is 
understandable for retail investors.
---------------------------------------------------------------------------

    \460\ See infra footnote 495 and accompanying text.
---------------------------------------------------------------------------

    Standard of Conduct. As proposed, we are adopting a requirement 
that firms describe their legal standard of conduct using prescribed 
wording (the ``standard of conduct disclosure'').\461\ In a change from 
the proposal, however, the final instructions modify both the content 
of the standard of conduct disclosure \462\ and its placement in the 
relationship summary. As discussed in more detail below, the final 
instructions require broker-dealers, investment advisers, and dual 
registrants to include a brief statement of the applicable standard of 
conduct.\463\ In addition, as discussed above, this disclosure is 
required to be included in the conflicts of interest section rather 
than a separate standard of conduct section.
---------------------------------------------------------------------------

    \461\ Under the proposal, broker-dealers that offer brokerage 
accounts to retail investors would have been required to include the 
following: ``[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.'' The 
bracketed wording would have been included only if the broker-dealer 
offered recommendations subject to Exchange Act Rule 15l-1. See 
Proposed Item 3.B.(1) of Form CRS. In addition, such broker-dealers 
would have had to include the following: ``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].'' The bracketed wording would only have been 
included if the broker-dealer offered recommendations subject to 
Regulation Best Interest. See Proposed Item 3.B.(2) of Form CRS.
     Under the proposal, investment advisers that offer investment 
advisory accounts to retail investors would have had to include the 
following: ``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.]'' The bracketed wording would have 
been omitted if the investment adviser did not provide ongoing 
advice. See Proposed Item 3.C.(1) of Form CRS. In addition, such 
investment advisers would have had to include the following: ``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.'' See Proposed 
Item 3.C.(2) of Form CRS.
    The section also required a statement that the firm's interests 
may conflict with a retail investor's interests and explain the 
firm's obligations with respect to those conflicts using prescribed 
wording. See Proposed Item 3 of Form CRS.
    \462\ Form CRS also includes a conversation starter regarding 
broker-dealers and investment advisers' standards of conduct. See 
infra footnote 495 and accompanying text.
    \463\ Item 3.B.(i) of Form CRS.
---------------------------------------------------------------------------

    Most commenters did not object to the proposal's requirement that 
broker-dealers and investment advisers provide disclosure regarding 
their standards of conduct or that such disclosure be 
standardized.\464\ Results of the RAND 2018 report and other investor 
studies and surveys indicate that retail investors view this 
information as helpful.\465\ Similarly, commenters on Feedback Forms 
indicated that this information was useful.\466\ In addition, the IAC 
recommended that investors would benefit from receiving uniform, plain-
English disclosure documents with topics, such as, to the extent the 
Commission does not adopt a uniform fiduciary standard, ``what is your 
legal obligation to me?'' \467\ Certain commenters, however, suggested 
that the Commission discuss generally applicable information, including 
standards of conduct, in investor educational materials instead of 
requiring firms to do so in their relationship summaries.\468\ A number 
of these commenters argued that this wording might unintentionally 
create an implied contractual relationship subject to a customer's 
private right of action.\469\ The prescribed language describing the 
standard of conduct broker-dealers and investment advisers owe to their 
customers and clients is not intended to create a private right of 
action.
---------------------------------------------------------------------------

    \464\ See, e.g., AARP Letter; CFA Institute Letter I; IAA Letter 
II.
    \465\ See RAND 2018, supra footnote 13 (almost one third of 
survey respondents selected this section as one of the two most 
useful; almost 60% would keep the length as is and over 15% would 
add detail); Cetera Letter II (Woelfel), supra footnote 17 (88% of 
survey respondents somewhat or strongly agreed ``the firm's 
obligations to you'' is a ``very or somewhat important'' topic); see 
also Schwab Letter I (Koski), supra footnote 21 (``obligations of 
the firm'' ranked third where survey participants were asked to 
identify four topics as most important for a firm to communicate'').
    \466\ Feedback Forms Comment Summary, supra footnote 11 (summary 
of responses to Question 2(b)) (36 commenters (39%) graded the ``Our 
Obligations to You'' section of the relationship summary as ``very 
useful'' and 42 commenters (45%) graded this section as ``useful'').
    \467\ IAC Broker-Dealer Fiduciary Duty Recommendations, supra 
footnote 10.
    \468\ See, e.g., Primerica Letter.
    \469\ See ASA Letter; Primerica Letter; Transamerica Letter 
(requesting a statement from the Commission that any such private 
right of action was not intended).
---------------------------------------------------------------------------

    Many commenters, however, found that the specific wording we 
proposed \470\ did not effectively address investor confusion 
concerning legal duties applicable to broker-dealers and investment 
advisers. Commenters indicated that the proposed wording in this 
section was confusing and did not clarify the applicable legal 
standards.\471\ Some commenters argued that this section included legal 
jargon inaccessible to retail investors.\472\ Others believed that 
retail investors are unlikely to understand the difference between 
``best interest'' and ``fiduciary,'' with some suggesting that 
relationship summaries more clearly define the applicable legal 
standards or communicate the differences between ``fiduciary'' and 
``best interest.'' \473\ Investment advisers also expressed concern 
that retail investors may ``wrongly'' view ``best interest'' as a 
higher standard of conduct as compared to the fiduciary standard.\474\
---------------------------------------------------------------------------

    \470\ See supra footnote 461.
    \471\ See, e.g., AARP Letter; Betterment Letter I; CFA Letter I.
    \472\ See Comment Letter of Fisher Investments (Jul. 31, 2018) 
(``Fisher Letter''); see also Kleimann I, supra footnote 19; RAND 
2018, supra footnote 13; Kleimann II, supra footnote 19.
    \473\ See, e.g., AARP Letter; CFA Letter I; Comment Letter of 
the Financial Planning Coalition (Aug. 7, 2018) (``Financial 
Planning Coalition Letter'').
    \474\ See, e.g., Betterment Letter I; Fisher Letter; IAA Letter 
I; IAA Letter II.
---------------------------------------------------------------------------

    Investor feedback through surveys and studies and in comments at 
roundtables and on Feedback Forms also showed some confusion. For 
example, some participants in investor studies and at one of the 
roundtables did not understand why conflicts of interest existed if 
broker-dealers and investment advisers were held to the standards of 
conduct described.\475\ Investor studies and surveys showed

[[Page 33531]]

that participants varied in their understanding of differing 
obligations for different account types, some viewing brokerage 
accounts and advisory accounts as subject to similar standards of 
conduct but others interpreting the section as conveying that the two 
account types are subject to different standards.\476\ Observations 
reported by the RAND 2018 report, other surveys and studies and 
comments received on Feedback Forms demonstrated that many participants 
did not understand the meaning of the word ``fiduciary'' in 
particular.\477\ Investor studies also further observed that, when 
presented with alternative mock-ups of a relationship summary designed 
to clarify this section, some investors still struggled with 
understanding the legal obligations of brokers and advisers.\478\
---------------------------------------------------------------------------

    \475\ See RAND 2018, supra footnote 13 (in qualitative 
interviews, participants felt that the conflicts of interest section 
contradicted the ``Our Obligations to You'' section); Miami 
Roundtable.
    \476\ See RAND 2018, supra footnote 13; see also Kleimann I, 
supra footnote 19 (``Most participants did not draw a parallel 
between the `best interest standard' of the Broker-Dealers and the 
`fiduciary standard' of Investment Advisers. Rather, they drew a 
parallel between `specific obligations' with Broker-Dealers and 
`fiduciary standards' with Investment Advisers . . . [and] saw these 
two as similar regulatory obligations.''); Betterment Letter I 
(Hotspex), supra footnote 18 (in a survey that tested participant's 
comprehension after viewing a version of the proposed sample 
standalone adviser relationship summary, only 26% correctly 
identified as false a statement that broker-dealers are held to a 
fiduciary standard; 71% correctly identified as true that an adviser 
(Betterment) would be held to a fiduciary standard).
    \477\ See, e.g., RAND 2018, supra footnote 13 (``Some 
participants had never heard of the word, whereas others had heard 
it but did not know what it meant in this context. Others thought 
the word ``fiduciary implies acting in best interest . . .''); 
Kleimann I, supra footnote 19 (``Few participants could define 
`fiduciary standard' ''); see also Feedback Forms Comment Summary, 
supra footnote 11 (summary of responses to Question 4) (On 10 
Feedback Forms, commenters specifically asked for a definition or 
better explanation of the term ``fiduciary.'').
    \478\ See, e.g., Kleimann II, supra footnote 19 (explains that, 
after redesign of obligations section participants still struggled 
to understand the implications of the fiduciary standard for 
advisers compared to the best interest standard for broker-dealers); 
Betterment Letter I (Hotspex), supra footnote 20 (almost one half of 
survey participants reviewing a version of the standalone adviser 
relationship summary designed by Betterment did not correctly 
identify as false a statement that broker-dealers are held to a 
fiduciary standard).
---------------------------------------------------------------------------

    We proposed this section to address investor confusion concerning 
legal duties applicable to broker-dealers and investment advisers and, 
in combination with the key questions about the financial 
professional's legal obligations, to encourage a conversation between 
the retail investor and the financial professional about applicable 
standards of conduct.\479\ The prescribed wording was intended to 
promote consistency in communicating these standards to retail 
investors.\480\
---------------------------------------------------------------------------

    \479\ See Proposing Release, supra footnote 5, at n.114 and 
accompanying text.
    \480\ Proposing Release, supra footnote 5, at n.115 and 
accompanying text.
---------------------------------------------------------------------------

    We continue to believe that it is appropriate for the final 
instructions to require broker-dealers and investment advisers to 
describe their standards of conduct to investors, because, as discussed 
above, we believe that it is important to promote retail investors' 
understanding of these obligations. We also agree with commenters that 
requiring these firms to include prescribed disclosure regarding these 
standards of conduct is important in achieving this goal.\481\ While 
the final instructions generally do not require prescribed disclosure 
in other contexts,\482\ we believe that investors should be provided 
with a consistent articulation of their firm's legal obligations 
regarding their standard of conduct and that the rationale for allowing 
firms flexibility to tailor their disclosure in other aspects of the 
relationship summary does not apply with respect to the standard of 
conduct. In this regard, some commenters stated that Form CRS should be 
an educational document, which would be a standardized document 
published and maintained by the Commission.\483\ While the content of 
disclosure regarding a firm's standard of conduct should be uniform, 
this disclosure should appear in the relationship summary, which must 
be delivered to all retail investors, rather than a separate SEC-staff-
created and maintained publication. In addition, prescribing language 
for this disclosure does not raise the same concerns that commenters 
raised about prescribed language generally. For example, we are 
permitting more flexibility in how firms describe their fees and 
services in response to comments that some of the prescribed wording, 
for example, was not necessarily applicable to their business and could 
make investors confused.\484\
---------------------------------------------------------------------------

    \481\ But see footnotes 468-469 and accompanying text.
    \482\ As discussed in more detail above, many commenters who 
believed that the final instructions should not require prescribed 
disclosure focused on other aspects of the relationship summary, 
such as disclosure regarding a description of a firm's services. See 
supra Section II.A.1.
    \483\ See, e.g., Primerica Letter.
    \484\ See supra Section II.A.1. One commenter noted that 
requiring prescribed disclosure in some circumstances may not be 
accurate for all business models and could mislead investors. See 
CFA Letter I.
---------------------------------------------------------------------------

    By contrast, a legal standard of conduct, whether through an 
investment adviser's fiduciary duty, Regulation Best Interest, or both, 
will apply to all firms delivering the relationship summary that 
provide recommendations or investment advice, and prescribing language 
will avoid investor confusion when describing the applicable standard. 
Indeed, it may be confusing to investors comparing relationship 
summaries among prospective firms to see the same legal standard 
described differently among these firms. The required statements about 
the legal standard of conduct are disclosures of purely factual 
information about the terms under which the firms' services will be 
made available to investors.\485\
---------------------------------------------------------------------------

    \485\ See Zauderer, 471 U.S. at 651; Milavetz, 559 U.S. at 250.
---------------------------------------------------------------------------

    We have determined, however, that the proposed standard of conduct 
disclosure may not have appropriately addressed investor confusion. 
While the proposal was intended to provide retail investors with 
simple, easily understood disclosure, we agree with commenters and 
results from investor studies and surveys,\486\ that the relationship 
summary could be revised in a manner that would be more beneficial to 
retail investors,\487\ especially in light of the similarity between 
broker-dealers' and investment advisers' legal obligations to retail 
investors with respect to their standards of conduct when providing 
recommendations or advice under the rules and interpretations we are 
adopting concurrently.\488\ In this regard, we have modified the 
standard of conduct disclosure to include it within the conflicts of 
interest section of the relationship summary and to contain simplified 
wording that is short, plain language, and user-friendly but still 
describes the key components of a broker-dealer's or investment 
adviser's standard of conduct when providing recommendations or 
advice.\489\
---------------------------------------------------------------------------

    \486\ See supra Section II.A.
    \487\ See, e.g., AARP Letter.
    \488\ See Fiduciary Release, supra footnote 47; Regulation Best 
Interest Release, supra footnote 47.
    \489\ The final instructions provide that if a required 
disclosure or conversation starter is inapplicable or specific 
wording required by the instructions is inaccurate, firms may omit 
or modify that disclosure or conversation starter. See General 
Instruction 2.B. to Form CRS. We note that, like the proposal, the 
standard of conduct disclosure distinguishes between broker-dealers 
that provide recommendations subject to Regulation Best Interest and 
broker-dealers that do not provide recommendations subject to 
Regulation Best Interest. See infra footnote 507 and accompanying 
text.
---------------------------------------------------------------------------

    First, we are modifying the standard of conduct disclosure so that 
it is required to be provided under a modified heading \490\ in the 
conflicts of

[[Page 33532]]

interest section.\491\ While broker-dealers' and investment advisers' 
legal obligations regarding their standard of conduct apply not just in 
the context of conflicts of interest,\492\ we believe that requiring 
this disclosure to be included in the conflicts of interest section 
will provide a retail investor with a greater ability to discern how a 
particular legal obligation regarding a standard of conduct may affect 
him or her by describing the application of that obligation in the 
context of conflicts of interest, which was a primary concern for 
retail investors and commenters alike.\493\ In addition, this placement 
is supported by observations reported in the RAND 2018 qualitative 
interviews and another study, which indicated that some participants 
struggled with how to reconcile the conflicts of interest section with 
the legal obligations section because they were discussed 
separately.\494\
---------------------------------------------------------------------------

    \490\ Item 3.B. of Form CRS; see also supra footnote 457.
    \491\ Item 3 of Form CRS.
    \492\ See Regulation Best Interest Release, supra footnote 47 
and Fiduciary Release, supra footnote 47.
    \493\ See Proposing Release, supra footnote 5, at Section 
II.B.6; supra footnote 475 and accompanying text.
    \494\ See, e.g., RAND 2018, supra footnote 13 (noting that 
``[s]ome participants expressed appreciation that the firm was being 
transparent about its conflicts of interest, but many participants 
struggled with how to reconcile the information in this section with 
the previous `Our Obligations to You' section.''); Kleimann I, supra 
footnote 19; see also infra footnote 505 and accompanying text.
---------------------------------------------------------------------------

    Second, in the conversation starter relating to this section, we 
are requiring firms to include the following question: ``How might your 
conflicts of interest affect me, and how will you address them?'' \495\ 
As discussed above, we believe that including questions for investors 
to ask their financial professionals is an important component of the 
relationship summary. This question also underscores for retail 
investors that investment advisers and broker-dealers have conflicts 
that may create incentives to put their interests ahead of the 
interests of their retail clients and customers.\496\ As a corollary, 
it also underscores for retail investors how investment advisers and 
broker-dealers address these conflicts of interest in discharging their 
legal obligations regarding their standards of conduct to these 
investors. We believe that this requirement will improve a retail 
investor's understanding of the standard of conduct owed by his or her 
financial professional by helping the investor to better understand its 
application to him or her.
---------------------------------------------------------------------------

    \495\ Item 3.B.(iii) of Form CRS.
    \496\ See supra Section II.A.4.
---------------------------------------------------------------------------

    Unlike the proposal,\497\ the final instructions do not require 
prescribed disclosure summarizing how a firm's standard of conduct 
would require it to address conflicts of interest. As discussed above, 
commenters found the proposal's standard of conduct disclosure 
confusing.\498\ After considering comments and observations reported in 
surveys and studies, we recognize that the proposed disclosures were 
confusing, particularly the prescribed disclosure attempting to explain 
concepts of full and fair disclosure, mitigation, and informed 
consent.\499\ Accordingly, we are removing this wording to shorten the 
disclosure and to provide more focus on the rest of the disclosure 
required in this section, as we believe this should improve investor 
comprehension. We believe that clearly disclosing to investors that 
firms have an obligation to act in the best interest of a client or 
customer and also simultaneously have conflicts of interest is more 
important than describing the particular aspects of firms' general duty 
to disclose, mitigate, or obtain informed consent to conflicts, as 
applicable. Instead of this disclosure, we are requiring a conversation 
starter to encourage firms to discuss with retail investors how their 
standards of conduct require them to address conflicts of interests. In 
addition, we believe that the discussion prompted by the conversation 
starter accompanied by examples of conflicts of interest \500\ will 
provide retail investors with specific illustrations of how a firm's 
standard of conduct can apply, which could encourage investors to ask 
more detailed questions about how firms address their conflicts.
---------------------------------------------------------------------------

    \497\ See Proposed Items 3.B.2. and 3.C.2. of Form CRS.
    \498\ See supra footnote 471 and accompanying text. See also 
RAND 2018, supra footnote 13 (noting that one ``participant pointed 
out that the obligations section had said that any conflicts of 
interest would be reduced and disclosed [but] the conflicts of 
interest section does not mention disclosing or reducing conflicts); 
Kleimann II, supra footnote 19 (``Most participants did not 
understand how conflicts would be resolved . . . they read the 
disclosure as indicating that Brokerage Accounts were under no 
obligation to notify clients of a conflict . . .'').
    \499\ See Fiduciary Release, supra footnote 47 (discussing the 
concepts of full and fair disclosure, mitigation, and informed 
consent).
    \500\ Item 3.B.(ii) of Form CRS.
---------------------------------------------------------------------------

    Finally, we have modified the standard of conduct disclosure for 
broker-dealers and investment advisers to reduce the amount of required 
disclosure,\501\ to focus the disclosure on the standard of conduct 
that applies to the provision of recommendations and advice,\502\ and 
to require that portions of the disclosure be presented in bold and 
italicized font.\503\ We believe that streamlining the standard of 
conduct disclosure and tailoring the disclosure to the type of firm 
providing such disclosure will clarify for retail investors the 
applicable legal standard of conduct to which their particular firm is 
subject when providing recommendations or advice or when providing 
broker-dealer services without recommendations.
---------------------------------------------------------------------------

    \501\ Items 3.B.(i).a. and 3.B.(i).b. of Form CRS.
    \502\ Item 3.B. of Form CRS (heading).
    \503\ Items 3.B.(i).a., 3.B.(i).b., and 3.B.(i).c. of Form CRS.
---------------------------------------------------------------------------

    Most commenters found the proposal's standard of conduct disclosure 
confusing because it included legal or technical words. For example, 
some commenters, and results from investor studies and surveys, 
indicated that many did not understand the meaning of ``fiduciary'' or 
had never heard of the word.\504\ Accordingly, the modified standard of 
conduct disclosure both eliminates technical words, such as 
``fiduciary,'' and describes the standards of conduct of broker-
dealers, investment advisers, or dual registrants using similar 
terminology in a plain-English manner. In particular, the final 
instructions use the term ``best interest'' to describe how broker-
dealers, investment advisers, and dual registrants must act regarding 
their retail customers or clients when providing recommendations as a 
broker-dealer or acting as an investment adviser.\505\ We believe that 
requiring firms--whether broker-dealers, investment advisers, or dual 
registrants--to use the term ``best interest'' to describe their 
applicable standard of conduct will clarify for retail investors their 
firm's legal obligation in this respect, regardless of whether that 
obligation arises from Regulation Best Interest or an investment 
adviser's fiduciary duty under the Investment Advisers Act.\506\ The 
modified language, however, highlights a key difference in when a firm 
must exercise its obligation--specifically, when providing a 
recommendation (in the case of a broker-dealer),\507\ or when acting as 
an

[[Page 33533]]

investment adviser,\508\ or either providing a recommendation or acting 
as an investment adviser (in the case of a dual registrant).\509\ 
Portions of the modified standard of conduct disclosure also are 
required to be presented in bold and italicized font.\510\ The final 
instructions are designed to provide retail investors with a clear 
understanding of when a firm's legal obligations regarding its standard 
of conduct is required to be discharged. In addition, with respect to 
broker-dealers, the modified standard of conduct disclosure, like the 
proposal,\511\ distinguishes between broker-dealers that provide 
recommendations subject to Regulation Best Interest and broker-dealers 
that do not provide recommendations subject to Regulation Best Interest 
(e.g., execution-only brokers). The modified standard of conduct 
disclosure also requires that broker-dealers, investment advisers, and 
dual registrants to state that conflicts of interest will remain 
despite the existence of these legal obligations, and to provide 
examples of these conflicts.\512\ This change is designed to address 
commenters' concerns that we clarify for retail investors the 
interaction between broker-dealers' or investment advisers' legal 
obligations regarding their standards of conduct and their conflicts of 
interest.
---------------------------------------------------------------------------

    \504\ See supra footnote 477 and accompanying text; see also CFA 
Letter I (citing to ``man on the street'' interviews suggesting that 
average investors do not understand the term ``fiduciary''); 
Consumer Reports Letter (commenting on the RAND 2018 report).
    \505\ Item 3.B.(i) of Form CRS.
    \506\ See Fiduciary Release, supra footnote 47; Regulation Best 
Interest Release, supra footnote 47.
    \507\ Item 3.B.(i).a. of Form CRS (requiring broker-dealers that 
provide recommendations subject to Regulation Best Interest to 
include (emphasis required): ``When we provide you with a 
recommendation, we have to act in your best interest and not put our 
interest ahead of yours. At the same time, the way we make money 
creates some conflicts with your interests. You should understand 
and ask us about these conflicts because they can affect the 
recommendations we provide you. Here are some examples to help you 
understand what this means,'' and broker-dealers that do not provide 
recommendations subject to Regulation Best Interest to include 
(emphasis required): ``We do not provide recommendations. The way we 
make money creates some conflicts with your interests. You should 
understand and ask us about these conflicts because they can affect 
the services we provide you. Here are some examples to help you 
understand what this means.'').
    \508\ Item 3.B.(i).b. of Form CRS (requiring investment advisers 
to include (emphasis required): ``When we act as your investment 
adviser, we have to act in your best interest and not put our 
interest ahead of yours. At the same time, the way we make money 
creates some conflicts with your interests. You should understand 
and ask us about these conflicts because they can affect the 
investment advice we provide you. Here are some examples to help you 
understand what this means.'').
    \509\ Item 3.B.(i).c. of Form CRS (requiring dual registrants 
that prepare a single relationship summary and provide 
recommendations subject to Regulation Best Interest to include 
(emphasis required): ``When we provide you with a recommendation as 
your broker-dealer or act as your investment adviser, we have to act 
in your best interest and not put our interest ahead of yours. At 
the same time, the way we make money creates some conflicts with 
your interests. You should understand and ask us about these 
conflicts because they can affect the recommendations and investment 
advice we provide you. Here are some examples to help you understand 
what this means,'' and dual registrants that prepare a single 
relationship summary and do not provide recommendations subject to 
Regulation Best Interest to include (emphasis required): ``We do not 
provide recommendations as your broker-dealer. When we act as your 
investment adviser, we have to act in your best interest and not put 
our interests ahead of yours. At the same time, the way we make 
money creates some conflicts with your interest. You should 
understand and ask us about these conflicts because they can affect 
the services and investment advice we provide you. Here are some 
examples to help you understand what this means.'' Also requiring 
that dual registrants that prepare two separate relationship 
summaries follow the instructions for broker-dealers and investment 
advisers in Items 3.B., 3.B.(i).a. and 3.B.(i).b.).
    \510\ Items 3.B.(i).a. (``When we provide you with a 
recommendation'' and ``do not''), 3.B.(i).b. (``When we act as your 
investment adviser''), and 3.B.(i).c. (``When we provide you with a 
recommendation as your broker-dealer or act as your investment 
adviser,'' ``do not,'' and ``When we act as your investment 
adviser'') of Form CRS.
    \511\ See Proposed Item 3.B. of Form CRS.
    \512\ Broker-dealers that do not provide recommendations subject 
to Regulation Best Interest will be required to include 
substantially the same conflict disclosure, except that it will 
reflect that conflicts of interest can affect the services provided, 
rather than referring to recommendations. See Items 3.B.(i).a. and 
3.B.i.(c) of Form CRS.
---------------------------------------------------------------------------

    Examples of Ways the Firm Makes Money and Conflicts of Interest. 
Following the standard of conduct prescribed wording, a firm must 
summarize the following ways in which it and its affiliates make money 
from brokerage or investment advisory services and investments it 
provides to retail investors, to the extent they are applicable to the 
firm.\513\ The specific wording is not prescribed, but firms must 
include specific information to describe each of the applicable 
conflicts.
---------------------------------------------------------------------------

    \513\ Item 3.B.(iv) of Form CRS.
---------------------------------------------------------------------------

     Proprietary Products: Investments that are issued, 
sponsored, or managed by you or your affiliates;
     Third-Party Payments: Compensation received from third 
parties when a firm recommends or sells certain investments;
     Revenue Sharing: Investments where 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; and
     Principal Trading: Investments the firm buys from a retail 
investor, and/or investments the firm sells to a retail investor, for 
or from the firm's own accounts, respectively.\514\
---------------------------------------------------------------------------

    \514\ Items 3.B.(iv)(a) through 3.B.(iv)(d) of Form CRS.
---------------------------------------------------------------------------

    If none of those conflicts apply to the firm, it must summarize at 
least one of its material conflicts of interest that affect retail 
investors. Firms will be required to explain the incentives created by 
each of these examples.\515\
---------------------------------------------------------------------------

    \515\ Item 3.B.(iv) of Form CRS.
---------------------------------------------------------------------------

    The proposal would have required a firm to discuss these same 
enumerated topics, to the extent they were relevant. If none of the 
four specified conflicts applied to a firm, the firm was not required 
to discuss any other conflicts that applied to its business. The 
proposal did not require a firm to summarize other ways its affiliates 
made money from the services and products the firm provides to retail 
investors.
    We are adopting a heading that specifically asks how else the firm 
makes money in an effort to further highlight the firm's financial 
incentives and emphasize that they are intertwined with conflicts. In a 
departure from the proposal, the relationship summary will not include 
an introductory sentence explaining that the firm benefits from the 
services it provides to the retail investor because we believe that the 
new heading and required content of this item make this sentence 
unnecessary. We are also expanding the required conflicts disclosures 
to ensure that firms without any of the enumerated conflicts will still 
summarize at least one other material conflict of interest. Firms will 
include the four enumerated conflicts (if applicable) that were in the 
proposal, or otherwise at least one material conflict of interest, and 
a specific cross-reference to more detailed information about 
conflicts. Firms with none of the enumerated conflicts should carefully 
consider their operations in their entirety when selecting a material 
conflict to disclose to retail investors. While we think it is unlikely 
that a firm will not have any material conflicts to disclose, if this 
item is inapplicable, firms may omit or modify this disclosure.\516\
---------------------------------------------------------------------------

    \516\ General Instruction 2.B. of Form CRS.
---------------------------------------------------------------------------

    Commenters generally believed that at least some conflicts 
disclosure was important to include in the relationship summary, but 
many suggested changes to the approach, including fewer conflicts 
disclosures and increased use of layered disclosure.\517\ Commenters 
generally supported requiring firms to disclose the types of conflicts 
of interest related to these financial incentives identified in the 
proposal, specifically disclosure regarding proprietary products,\518\ 
compensation received

[[Page 33534]]

from third parties,\519\ revenue sharing,\520\ and principal 
trading.\521\
---------------------------------------------------------------------------

    \517\ See, e.g., IAA Letter I (suggesting leveraging disclosures 
made elsewhere on Part 2 of Form ADV); SIFMA Letter (suggesting 
leveraging disclosures that would be required by Regulation Best 
Interest); Fidelity Letter and Schwab Letter I (suggesting using 
examples of conflicts, with links to additional disclosure).
    \518\ See Fidelity Letter; Schwab Letter I; SIFMA Letter.
    \519\ See, e.g., IFS Letter; IAA Letter I; Wells Fargo Letter; 
Primerica Letter (suggesting including in additional layered 
disclosure).
    \520\ See Fidelity Letter (third-party revenue sharing 
agreements in mock-up).
    \521\ See mock-ups in IAA Letter I; Primerica Letter; Wells 
Fargo Letter.
---------------------------------------------------------------------------

    Investor feedback, however, was mixed. Results from the RAND 2018 
survey and another survey indicated that many survey participants did 
not find this section to be as informative as other sections,\522\ and 
some participants in surveys and studies indicated that this section 
was ``difficult'' or ``very difficult'' to understand.\523\ About 75% 
of Feedback Form commenters rated the conflicts of interest section as 
either ``very useful'' or ``useful,'' while narrative comments on the 
Feedback Forms suggested that the conflicts of interest disclosure 
could be clarified or otherwise improved.\524\
---------------------------------------------------------------------------

    \522\ See RAND 2018, supra footnote 13 (conflicts of interest 
was selected as one of the two most informative sections by only 15% 
of survey respondents and selected as one of the two least 
informative by 36%); Cetera Letter II (Woelfel), supra footnote 17 
(81% of survey respondents strongly or somewhat agreed that 
conflicts of interest is an important topic in the relationship 
summary, fewer than for any other topic); see also Margolis Feedback 
Form (stating that the conflicts of interest section is very 
confusing, particularly with respect to fee-sharing arrangements and 
referral fees).
    \523\ See RAND 2018, supra footnote 13 (about one third of 
survey respondents found this section to be difficult or very 
difficult to understand; in qualitative interviews, participants 
demonstrated misunderstanding of how this section reconciled with 
the ``obligations to you'' section and how conflicts would be 
resolved); Kleimann I, supra footnote 19 (interview participants had 
difficulty explaining how firms earned money from financial 
relationships that could cause conflicts and were unclear how 
conflicts would be resolved); Betterment Letter I (Hotspex), supra 
footnote 18 (noting that further improvements could be made to 
improve respondents understanding of differences in conflicts).
    \524\ Feedback Forms Comment Summary, supra footnote 11 (summary 
of responses to Question 2(e) and Question 4). Among the 41 Feedback 
Forms with narrative comments suggesting that one or more topics 
were too technical or could be improved, 14 included a narrative 
comment suggesting clarification or more information about conflicts 
of interest. See, e.g., Baker Feedback Form (``A sampling of 
possible conflict-of-interest situations is most desirable''); 
Bhupalam Feedback Form (``It doesn't clearly tell me whether the 
company will do this or not. In fact, it tells me that the company 
may do this and I should be fine with it.''); Lee2 Feedback Form 
(``What can I expect and not expect about the independence and 
conflict-free nature of the advice''); Margolis Feedback Form 
(``While I agree that fee-sharing arrangements and referral fees 
need to be disclosed, your wording is confusing''); Schreiner 
Feedback Form (``highlight implications of conflicts of interest'').
---------------------------------------------------------------------------

    Several commenters suggested that we broaden the disclosures to 
require a firm to inform its retail investors of all of the conflicts 
related to its business.\525\ Commenters also supported highlighting 
conflicts of interest stemming from affiliates,\526\ and several 
commenters included disclosure about affiliates in their mock-ups.\527\ 
One industry commenter expressed concern that including solely the 
proposed conflicts in isolation and on a standalone basis may lead 
investors to think these are the only meaningful conflicts.\528\ Other 
commenters pointed out that if only the proposed conflicts were 
required to be included, then some firms would not include any 
conflicts disclosures because their conflicts do not fall within the 
requisite categories.\529\ Furthermore, one commenter proposed to allow 
firms to affirmatively state that they did not have any of these 
conflicts without further disclosure of the firm's other conflicts of 
interest.\530\
---------------------------------------------------------------------------

    \525\ See CFA Institute Letter I; Trailhead Consulting Letter.
    \526\ See Comment Letter of Jackson, Grant Investment Advisers, 
Inc. (Aug. 7, 2018) (``Jackson Grant Letter'') (stating that other 
compensation (such as recommending proprietary products and products 
of affiliates) needs to be addressed for the investor to fully 
understand the potential for conflicts in any relationship).
    \527\ See SIFMA Letter; Wells Fargo Letter; Schwab Letter I; 
Comment Letter of Ron A. Rhoades, Western Kentucky University (Dec. 
6, 2018) (``Rhoades Letter''); Stifel Letter (mock-up); Cetera 
Letter I; Betterment Letter I; ASA Letter (mock-up).
    \528\ IAA Letter I.
    \529\ See Paul Hynes Letter; Betterment Letter I (stating that 
their business model avoids the proposed conflicts of interest, and 
proposing an alternate ``alignment of interest'' section for the 
section on conflicts of interest).
    \530\ Betterment Letter I (indicating that the firm had none of 
the proposed enumerated conflicts).
---------------------------------------------------------------------------

    We continue to believe that the conflicts we identified in the 
proposal should be highlighted to retail investors in the relationship 
summary. Accordingly, we are including in the final instructions a 
requirement that firms describe these four conflicts to the extent that 
any of these conflicts apply to them. Like other sections in the 
relationship summary, this section will provide firms with more 
flexibility in the way in which they describe their particular 
conflicts so that they can tailor the summary to more accurately 
reflect their specific business. While we are maintaining the 
proposal's approach of requiring firms to provide information about 
certain types of conflicts applicable to them, we are not requiring 
firms to state as many specific details with respect to such 
conflicts.\531\ For example, the proposed instructions would have 
required firms to provide specific examples of advising on proprietary 
or affiliated investments or investments paying the firm a share of 
revenue, and we have removed such requirements from the final 
instructions. Instead, the relationship summary will focus on four 
specific ways a firm could make money from retail investors' 
investments to highlight that firms have conflicts of interest and 
encourage retail investors to ask and learn more about them.
---------------------------------------------------------------------------

    \531\ In addition, the IAC recommended that the Commission adopt 
a uniform, plain English document that covers basic information 
about conflicts of interest, among other topics. See IAC Broker-
Dealer Fiduciary Duty Recommendations, supra footnote 10.
---------------------------------------------------------------------------

    Additionally, as some commenters pointed out, we agree that not 
mentioning any conflicts, or permitting the firm to affirmatively state 
that it has none of the enumerated conflicts, could lead retail 
investors to conclude that the particular firm does not have any 
material conflicts. Accordingly, the instructions require a firm that 
does not have any of the four required categories of conflicts to 
provide at least one example of the firm's conflicts of interest. 
Specially, the instructions require a firm to summarize at least one 
material conflict of interest that affects retail investors.\532\ Firms 
are not expected to disclose every material conflict of interest, and 
should instead consider what would be most relevant for retail 
investors to know in deciding whether to select or retain the 
particular firm.
---------------------------------------------------------------------------

    \532\ As discussed in Section II.A.1. above, if a required 
disclosure is inapplicable to a firm's business, a firm would be 
permitted to omit or modify that disclosure. General Instruction 
2.B. We believe, however, that most firms will have at least one 
material conflict of interest that they would need to disclose.
---------------------------------------------------------------------------

    We determined to require an example of a conflict, rather than 
broadening the instruction to include all conflicts, as some commenters 
suggested. The language disclosing firms' standard of conduct and 
existence of conflicts includes wording to make explicit that the 
conflicts described in the relationship summary are examples. Firms 
will disclose at least one of their material conflicts of interest that 
impact their retail investors, and such a conflict is not limited 
expressly to financial conflicts. In addition, with respect to broker-
dealers, this conflict disclosure (unlike the conflict disclosure 
obligation in Regulation Best Interest) \533\ is not limited to 
conflicts associated with a recommendation.\534\ To determine whether a 
conflict of interest should be disclosed, a firm could consider, for 
example, the benefit to the firm or its affiliate or the cost to the 
retail investor.
---------------------------------------------------------------------------

    \533\ See Regulation Best Interest Release, supra footnote 47, 
at Section II.C.1 (Disclosure Obligation).
    \534\ For instance, broker-dealers may include conflicts that 
affect product offerings to customers who do not obtain 
recommendations from the firm.

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

[[Page 33535]]

    We believe that an exhaustive list of conflicts in the relationship 
summary would not as effectively enhance investor understanding of 
conflicts. More details could inundate investors with information that 
makes it difficult for them to focus on the fact that conflicts exist 
and will impact them, and they may not focus on or may not realize the 
importance of the specific conflicts firms are required to summarize. 
We also agree with comments that disclosure of all conflicts would be 
too cumbersome \535\ and lengthy for the relationship summary's 
intended purpose--that is, highlighting certain aspects of a firm and 
its services to help retail investors to make an informed choice and to 
find additional information about a topic. The approach we are adopting 
of requiring firms to provide examples will make retail investors aware 
that these types of conflicts exist, but will avoid providing a laundry 
list of conflicts. Taking into account all of these considerations, we 
believe that these examples of conflicts of interest should be 
highlighted for the investor. We recognize that this will be a high-
level summary of conflicts and generally will not be a complete 
description. As discussed further below, we are requiring firms to 
include a link to additional information on their conflicts of 
interest.\536\ This layered disclosure will facilitate investors' 
ability to review additional information on conflicts while balancing 
the high-level nature of the relationship summary.
---------------------------------------------------------------------------

    \535\ See, e.g., CFA Letter I; SIFMA Letter; Prudential Letter.
    \536\ Item 3.B.(iv) of Form CRS (Firms must include specific 
references to more detailed information about their conflicts of 
interest that, at a minimum, include the same or equivalent 
information to that required by the Form ADV, Part 2A brochure and 
Regulation Best Interest, as applicable, and broker-dealers that do 
not provide recommendations subject to Regulation Best Interest, to 
the extent they prepare more detailed information about their 
conflicts, must include specific references to such information.).
---------------------------------------------------------------------------

    Conversation Starter and Additional Information. To promote access 
to information about other firm conflicts, as well as to clarify for 
retail investors the application of their firms' standard of conduct as 
discussed above, firms will include a conversation starter prompting 
investors to ask about conflicts and a hyperlink to additional 
information. Specifically, firms must include the following question as 
a conversation starter: ``How might your conflicts of interest affect 
me, and how will you address them?'' \537\
---------------------------------------------------------------------------

    \537\ Item 3.B.(iii) of Form CRS.
---------------------------------------------------------------------------

    The proposal included a longer key question asking about the most 
common conflicts of interest in the firm's advisory and brokerage 
accounts and how the firm will address those conflicts when providing 
services to the retail investor.\538\ One commenter noted that this key 
question elicited the same information as provided elsewhere in the 
relationship summary.\539\ We shortened the question to avoid this 
duplication. In addition, the firm's other conflicts will be disclosed 
as part of the summary of material conflicts or in the additional 
conflicts disclosure that firms will cross-reference. The new 
conversation starter is meant to complement these other disclosures and 
elicit more information about how specifically the firm's conflicts of 
interest could affect the retail investor.
---------------------------------------------------------------------------

    \538\ Proposed Item 8 of Form CRS. The proposal included the 
following question: ``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.''
    \539\ See LPL Financial Letter.
---------------------------------------------------------------------------

    Firms will also include specific cross-references to more detailed 
information about conflicts of interest that, at a minimum, includes 
the same or equivalent information to that required about a firm by the 
Form ADV, Part 2A brochure and/or Regulation Best Interest.\540\ If a 
firm is a broker-dealer that does not provide recommendations subject 
to Regulation Best Interest, to the extent it prepares more detailed 
information about its conflicts, it must include specific references to 
such information.\541\ Firms may include hyperlinks, mouse-over 
windows, or other means of facilitating access to this additional 
information and to any additional examples or explanations of such 
conflicts of interest.\542\
---------------------------------------------------------------------------

    \540\ Item 3.B.(iv) of Form CRS.
    \541\ Item 3.B.(iv) of Form CRS.
    \542\ Item 3.B.(iv) of Form CRS. See also General Instructions 
3. and 4. of Form CRS (instructions applicable to electronic 
delivery). For further discussion of these provisions, see supra 
Section II.A.3. and footnotes 156 and 158 and accompanying text, and 
Section II.B.2.(b) and footnotes 348-349.
---------------------------------------------------------------------------

    Over 60% of RAND 2018 survey respondents indicated that they would 
be ``very likely'' or ``somewhat likely'' to click on hyperlinks 
related to conflicts of interest.\543\ While the proposal did not 
require firms to link to additional information with respect to their 
conflicts, several commenters suggested that the relationship summary 
include a link to all conflicts.\544\ We believe that using layered 
disclosure through cross-references to a more detailed discussion of 
conflicts balances the Commission's objective of concise disclosure 
while providing interested investors with tools to easily access 
additional, useful information.
---------------------------------------------------------------------------

    \543\ RAND 2018, supra footnote 13. But see Kleimann II, supra 
footnote 19 (only one interview participant said he would use the 
link in the conflicts of interest section).
    \544\ See, e.g., Fidelity Letter (mock-up); IAA Letter I (mock-
up); see also Kleimann II, supra footnote 19 (redesigned 
relationship summary suggests a link to more information about 
conflicts).
---------------------------------------------------------------------------

    Many industry commenters also suggested that Regulation Best 
Interest's and Form CRS's conflicts disclosures be coordinated, and 
that any conflict disclosure obligations under Regulation Best Interest 
should be satisfied upon delivery of the relationship summary.\545\ We 
recognize that broker-dealers may need to disclose additional conflicts 
or disclose additional conflicts at a point in time other than at the 
beginning of the relationship with an investor or other times the 
relationship summary is required to be delivered.\546\ The relationship 
summary will provide a high-level summary for investors so that they 
can engage in a conversation with their financial professional about 
investment advisory or brokerage services, and so that the investors 
can choose the type of service that best meets their needs. 
Furthermore, as discussed above in Section II.A (Presentation and 
Format),\547\ we believe it is essential to limit the length of the 
relationship summary and keep the disclosures focused, highlighting 
these topic areas while encouraging questions and providing access to 
additional information. As a result, we believe many firms may not be 
able to capture all of the necessary disclosures about their conflicts 
in this short summary disclosure.\548\ The layered disclosure approach 
should strike a balance between alerting investors of these conflicts 
while keeping with the intended purpose of the relationship summary.
---------------------------------------------------------------------------

    \545\ See, e.g., ACLI Letter; Cambridge Letter; Massachusetts 
Letter; FSI Letter I; MassMutual Letter; Schwab Letter I; SIFMA 
Letter; Transamerica Letter; see also Regulation Best Interest 
Release, supra footnote 47, at n.438 and accompanying text.
    \546\ See Regulation Best Interest Release, supra footnote 47.
    \547\ See supra Section II.A (Presentation and Format).
    \548\ For example, investment advisers must make full and fair 
disclosure to all clients of all material facts relating to the 
advisory relationship, including conflicts of interest. See 
Fiduciary Release, supra footnote 47; General Instruction 3 to Form 
ADV Part 2. Broker-dealers subject to Regulation Best Interest must 
also provide full and fair disclosure of material facts, including 
all material facts relating to conflicts of interest that are 
associated with the recommendation. See Regulation Best Interest 
Release, supra footnote 47.
---------------------------------------------------------------------------

    Finally, some commenters argued that the relationship summary 
should require firms to explain how conflicts will be mitigated or 
minimized, or that firms should be permitted to state that

[[Page 33536]]

a particular firm has fewer conflicts than other firms.\549\ While we 
agree that firms should have increased flexibility to describe 
conflicts, as discussed above, we are not permitting this additional 
disclosure. The purpose of this section is to highlight for investors 
that conflicts of interest exist.
---------------------------------------------------------------------------

    \549\ See AARP Letter; Betterment Letter I.
---------------------------------------------------------------------------

c. Payments to Financial Professionals
    Finally, in a change from the proposal, we are adding an additional 
section to Item 3 that requires a firm to include in its relationship 
summary the heading ``How do your financial professionals make money?'' 
\550\ A firm will summarize how its financial professionals are 
compensated (including cash and non-cash compensation) and the 
conflicts of interest those payments create.\551\ For example, the firm 
must, to the extent applicable, disclose whether financial 
professionals are compensated based on factors such as: The amount of 
client assets they service; the time and complexity required to meet a 
client's needs; the product sold (i.e., differential compensation); 
product sales commissions; or revenue the firm earns from the financial 
professional's advisory services or recommendations.\552\
---------------------------------------------------------------------------

    \550\ Item 3.C. of Form CRS.
    \551\ Item 3.C.(i) of Form CRS.
    \552\ Item 3.C.(ii) of Form CRS.
---------------------------------------------------------------------------

    In the Proposing Release, we asked if the relationship summary 
should include disclosure of compensation received by financial 
professionals and the related conflicts of interest such compensation 
might pose. Several commenters supported including disclosures related 
to the conflicts of interest that financial professionals' compensation 
arrangements create.\553\ Several commenters suggested featuring 
financial professionals' compensation in the relationship summary, 
including in a separate section.\554\ A number of commenters 
illustrated the importance of these disclosures by including sections 
discussing financial professionals' compensation in their mock-
ups.\555\ These disclosures generally included more detailed 
information about how broker-dealers and investment advisers earn money 
from various sources, in addition to what the retail investor may pay 
directly.
---------------------------------------------------------------------------

    \553\ See Proposing Release, supra footnote 5 (requesting 
comments on whether there are other considerations related to fees 
and compensation that we should require firms to highlight for 
retail investors that were not captured in the proposal); see also 
Jackson Grant Letter; Schwab Letter I; SIFMA Letter; Stifel Letter.
    \554\ See, e.g., Schwab Letter I; SIFMA Letter; Stifel Letter; 
Jackson Grant Letter. One industry commenter also stated that we 
should focus on conflicts that result from a financial 
professional's financial compensation. SIFMA Letter (also stating 
this view is consistent with FINRA's 2013 Conflicts of Interest 
Report, which specifically identified financial compensation as the 
major source of conflicts of interest for associated persons); see 
also CCMC Letter (investor polling) supra footnote 21 (in connection 
with investor polling, noting that investors identify explaining 
``own compensation'' as one of three ``issues that matter most'' to 
them).
    \555\ See Primerica Letter and ASA Letter (including disclosure 
stating that financial professional compensation is typically 
affected by the amount of client assets the financial professional 
is responsible for and the fees and commissions those assets 
generate); see also SIFMA Letter and Schwab Letter I (including 
disclosure on how the firm pays professionals who provide investment 
advice).
---------------------------------------------------------------------------

    We have concluded that disclosure of conflicts of interest related 
to a financial professional's compensation is useful to highlight for 
retail investors in the relationship summary.\556\ In particular, the 
commenters' mock-up disclosures highlighted the benefit of separately 
summarizing financial professionals' compensation to help retail 
investors identify and assess these conflicts of interest that may 
affect the services they receive.\557\ We believe that requiring 
specific information on financial professional compensation and 
conflicts related to that compensation will provide improved clarity 
from the proposal and better help retail investors understand these 
conflicts and how they might impact a financial professional's 
motivation. We also believe it is useful to specifically highlight this 
conflict for retail investors, as it is a different type of payment and 
a different type of conflict than a conflict at the firm level. We 
further believe that by placing this discussion directly after the 
discussion on fees, costs and conflicts, it will mitigate potential 
investor confusion. This approach is also consistent with Regulation 
Best Interest, which treats compensation to financial professionals and 
the conflicts of interest that such compensation creates as material 
facts that must be disclosed.\558\
---------------------------------------------------------------------------

    \556\ See Regulation Best Interest Release, supra footnote 47, 
at Section II.C.1.b.
    \557\ See, e.g., Primerica Letter; SIFMA Letter; Schwab Letter 
I.
    \558\ See Regulation Best Interest Release, supra footnote 47.
---------------------------------------------------------------------------

4. Disciplinary History
    The relationship summary will include a separate section about 
whether a firm or its financial professionals have reportable 
disciplinary history and where investors can conduct further research 
on these events.\559\ Inclusion of a separate disciplinary history 
section is a change from the proposed relationship summary, where this 
information was included in the Additional Information section.\560\ 
Certain commenters suggested that we remove the requirement that firms 
disclose whether or not they have disciplinary history.\561\ Similarly, 
some commenters suggested that any disciplinary information should 
simply direct retail investors to resources where they could review a 
firm's or a representative's disciplinary history, without any firm-
specific information in the relationship summary.\562\
---------------------------------------------------------------------------

    \559\ As proposed, we used the terms ``legal or disciplinary 
events.'' However, we are adopting the terms ``legal or disciplinary 
history'' for greater precision.
    \560\ See Proposing Release, supra footnote 5, at nn.270-71 and 
accompanying text.
    \561\ See, e.g., Wells Fargo Letter (arguing that any firm-based 
aspect of disciplinary disclosure is not fair to representatives of 
the firm without any history of wrongdoing); see also ACLI Letter; 
New York Life Letter (arguing that any firm-specific disciplinary 
history disclosure would prejudice large firms).
    \562\ See, e.g., LPL Financial Letter (mock-up suggested that 
``[f]or free tools to research our firm, our financial advisors and 
other firms, including our disciplinary events . . .'' investors 
should visit BrokerCheck or IAPD).
---------------------------------------------------------------------------

    We have concluded, however, based on consideration of commenters 
and investor feedback received through surveys and studies, at 
roundtables and in Feedback Forms, to include the disciplinary history 
as a separate section of the relationship summary.\563\ These comments 
emphasized the importance of disciplinary history information and 
advocated that it should be placed in a more prominent position than as 
part of the Additional Information section.\564\ Commenters also 
generally supported firm-specific disclosure as to whether the firm has 
disciplinary history.\565\ About 70% of commenters on Feedback Forms 
responded that they would seek

[[Page 33537]]

out additional information about a firm's disciplinary history.\566\ 
Similarly, more than 70% of investors surveyed in the RAND 2018 report 
reported that they were ``very likely'' or ``somewhat likely'' to look 
up the disciplinary history of a financial professional.\567\
---------------------------------------------------------------------------

    \563\ The IAC also recommended including disciplinary history in 
the relationship summary. See IAC Broker-Dealer Fiduciary Duty 
Recommendations, supra footnote 10 (``[W]e encourage the Commission 
to develop an approach to disclosure of disciplinary record that 
makes it easier for investors to assess the significance of 
disclosed events, particularly for firms that may have a large 
number of relatively insignificant technical violations.'').
    \564\ See, e.g., CFA Letter I (``The required disclosure 
regarding disciplinary events does not give adequate prominence to 
this issue.''); NASAA Letter (``The descriptor `Additional 
Information' is too vague to describe the important information in 
this section [and] should be recast as `Disciplinary History and 
Customer Rights and Remedies . . . .''); Trailhead Consulting Letter 
(``Legal and Disciplinary Actions are very important for an investor 
to consider and should not be `hidden' in an Additional Information 
section. This information deserves its own separate section.''); IAA 
Letter.
    \565\ See, e.g., CFA Letter I (``We believe this information is 
important enough to be highlighted under its own separate heading, 
`Do you have a disciplinary record?' '').
    \566\ See Feedback Forms Comment Summary, supra footnote 11 
(summary of responses to Question 3(e)). Some commented that, before 
viewing the relationship summary, they had not known that they could 
ask or how to check. See, e.g., Anonymous02 Feedback Form (``did not 
know how to do that''); Anonymous03 Feedback Form (``I looked up my 
advisor while reading through the summary''); Anonymous26 Feedback 
Form (``Now I know where to go''); Anonymous29 Feedback Form (``I 
didn't know if asked--they had to answer''); see also Philadelphia 
Roundtable (investor participant noting that ``checking your 
broker's disciplinary record'' is ``something that people should 
do'').
    \567\ See RAND 2018, supra footnote 13 (``More than 40 percent 
of respondents reported being very likely to look up the 
disciplinary history based on the information provided in the 
Relationship Summary, and another 35 percent reported being somewhat 
likely to look it up. Only 5 percent reported being not at all 
likely to do so.''); see also Kleimann II, supra footnote 19 (study 
participants who viewed a redesigned form reported that they would 
research the company they are doing business with''); but see Schwab 
Letter I (Koski), supra footnote 21 (only 20% of survey participants 
selected ``How to find disciplinary information about a firm or its 
representatives'' when asked to select the four most important 
topics for a firm to communicate, from a list of 11 topics).
---------------------------------------------------------------------------

    However, results from investor studies and surveys and investor 
comments on Feedback Forms supported the concern that the Additional 
Information section may not provide enough salience. For example, in 
the RAND 2018 survey, the Additional Information section was most often 
selected as one of the two least useful sections of the proposed 
relationship summary.\568\ On Feedback Forms, commenters rated the 
Additional Information section as ``very useful'' or ``useful'' less 
often than any other section of the relationship summary.\569\ One 
investor study suggested a reason for these mixed results, finding that 
participants would skip the Additional Information section, in part 
because they did not understand that the websites in the section would 
allow them to review the disciplinary history of the investment adviser 
or broker-dealer that they were considering.\570\ Comments on Feedback 
Forms similarly suggest that information about how to research a firm's 
disciplinary information should be presented more prominently and more 
simply in the relationship summary.\571\ After taking comments into 
consideration, we believe that a separate disciplinary history section 
is appropriate, with a requirement that firms explicitly state whether 
or not they have legal or disciplinary history so that investors can 
find the information in the summary with ease.
---------------------------------------------------------------------------

    \568\ See RAND 2018, supra footnote 14 (Additional Information 
section rated as one of the two ``least informative'' sections by 
66% of respondents; only 3% selected it as one of the two ``most 
informative''); see also Cetera Letter II (Woelfel), supra footnote 
17 (84% of survey respondents strongly or somewhat agreed that the 
``how to find additional information about a broker/adviser'' and 
``how to find additional information about the firm,'' fewer than 
for most other topics out of a series of nine topic options).
    \569\ Feedback Forms Comment Summary, supra footnote 11 (summary 
of responses to Question 2(f)) (Additional Information section rated 
as ``not useful'' or ``unsure'' by more commenters (20%) and ``very 
useful'' by fewer commenters (32%) relative to other sections of the 
relationship summary).
    \570\ See Kleimann I, supra footnote 19; see also Kleimann II, 
supra footnote 19 (noting that interview responses to links in the 
relationship summary ``suggest that use is dependent on perceived 
relevance . . . Some of that relevance can be built in with more 
specific descriptions of what can be found at the link.'').
    \571\ Some commenters on Feedback Forms suggested moving the 
Additional Information section forward in the relationship summary. 
See Anonymous14 Feedback Form (``Recommend add this to beginning of 
the pamphlet''); Durgin Feedback Form (``Additional info needs to be 
moved up''); Salkowitz Feedback Form (``Move this section to near 
the beginning''); Starmer2 Feedback Form (``put Key Questions and 
Additional Info up front to stimulate a conversation.''). Others 
commented that the presentation should be clearer. See, e.g., 
Anonymous28 Feedback Form (``Would be better titled `How to find out 
about us' or `Other information you need to know'''); Anonymous29 
Feedback Form (``plain language''); Calderon Feedback Form (``say 
expressly where that information is found, with linked URL's''); 
Shepard Feedback Form (``the easier it is to access, the better''); 
Baker Feedback Form (``Please explain IAPD'').
---------------------------------------------------------------------------

    The section will begin with the heading: ``Do you or your financial 
professionals have legal or disciplinary history?'' Firms will answer 
``yes'' or ``no,'' depending upon whether they or one of their 
financial professionals have a triggering event enumerated in the 
instructions, as discussed below. The proposed relationship summary 
required a statement that the firm has legal and disciplinary events 
but did not require an affirmative statement that a firm or its 
financial professionals did not have disclosable events. We are 
requiring a ``No'' answer in the final instructions where applicable, 
given the importance of disciplinary history and to provide a complete 
answer to the question in the heading.
    Regardless of whether firms report a ``Yes'' or ``No'' answer as to 
whether they or their financial professionals have legal or 
disciplinary history, the relationship summary will direct the retail 
investor to visit Investor.gov/CRS to research the firm and its 
financial professionals, as proposed.\572\ This is responsive to RAND 
2018 survey results, which indicated that 37% of investors did not know 
where to research disciplinary history.\573\ Directing retail investors 
to the search tool is also consistent with the Commission's Office of 
Investor Education and Advocacy initiative to encourage retail 
investors to do background checks on financial professionals and is 
intended to increase awareness of available search tools.\574\ In 
addition to disciplinary history, the search tools also can provide 
useful information regarding registration and licensing and financial 
professional employment history.
---------------------------------------------------------------------------

    \572\ Item 4.D.(i) of Form CRS. Investor.gov includes a search 
function that searches the databases Web CRD[supreg] and IARD, and 
this search will direct an investor to BrokerCheck and/or IAPD, as 
appropriate, where the investor can research disciplinary history.
    \573\ See RAND 2018, supra footnote 13. By contrast, 19% of 
surveyed investors cited the time and effort required and 10% of 
surveyed investors indicated that they would not look up a firm or 
financial professional's disciplinary history because the 
information was not very important to the investor. Id. We believe 
this is also consistent with the IAC's recommendation to ``look at 
whether it might be beneficial to adopt a layered approach to 
[disciplinary history] disclosures, with the goal of developing a 
more abbreviated, user-friendly document for distribution to 
investors.'' IAC Broker-Dealer Fiduciary Duty Recommendations, supra 
footnote 10.
    \574\ See https://www.investor.gov/research-before-you-invest.
---------------------------------------------------------------------------

    The triggering events for a statement that a firm does have legal 
or disciplinary history are the same as proposed.\575\ Following the 
heading, firms will be required to state ``Yes'' in response to the 
heading questions if they currently disclose or are required to 
disclose (i) disciplinary information per Item 11 of Part 1A or Item 9 
of Part 2A of Form ADV,\576\ or (ii) legal or disciplinary history per 
Items 11A-K of Form BD (``Uniform Application for

[[Page 33538]]

Broker-Dealer Registration'') \577\ except to the extent such 
information is not released to BrokerCheck pursuant to FINRA Rule 
8312.\578\ Regarding their financial professionals, firms will 
determine whether they need to include an affirmative statement based 
on legal and disciplinary information on Form U4,\579\ Form U5,\580\ or 
Form U6.\581\ In particular, firms will be required to state ``Yes'' if 
they have financial professionals for whom disciplinary history is 
reported per Items 14 A through M on Form U4, Items 7A or 7C through F 
on Form U5,\582\ or Form U6 except to the extent such information is 
not released to BrokerCheck pursuant to FINRA Rule 8312.\583\ Firms 
that do not have disclosable events for themselves or their financial 
professionals in connection with these provisions will state ``No'' in 
answer to the heading.\584\
---------------------------------------------------------------------------

    \575\ See Proposed Item 7.B. of Form CRS. In the proposal, firms 
with such events would have been required to state the following: 
``We have legal and disciplinary events.'' Id. For reasons discussed 
supra, we believe the question-and-answer formatting will make the 
relationship summary more useful to investors.
    \576\ Item 4.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 Amendments to Form ADV, Investment 
Advisers Act Release No. 3060 (Jul. 28, 2010) [75 FR 49233 (Aug. 12, 
2010)], at 22-27 (``Brochure Adopting Release''). 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 a disciplinary event 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.
    \577\ 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.
    \578\ 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.
    \579\ 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.
    \580\ Form U5 (Uniform Termination Notice for Securities 
Industry Registration) requires information about representatives' 
termination from their employers.
    \581\ 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.
    \582\ Item 7(b) of Form BD (Internal Review Disclosure) is not 
released to BrokerCheck by FINRA, pursuant to FINRA Rule 8312(d)(3).
    \583\ Item 4.B.(iii) of Form CRS.
    \584\ Item 4.C. of Form CRS.
---------------------------------------------------------------------------

    As noted above, several commenters opposed the approach of 
requiring firms to indicate in their relationship summaries whether 
they or their financial professionals have disciplinary history, 
questioning the value of the disclosure to retail investors,\585\ or 
citing to prejudicial or competitive concerns.\586\ These firms 
recommended that the relationship summary include only a prompt for 
investors to research the disciplinary history of the firm or financial 
professional, directing them to Investor.gov/CRS.\587\
---------------------------------------------------------------------------

    \585\ See NSCP Letter (``NSCP members believe that extending the 
disclosure of disciplinary history to be included in Form CRS would 
add additional administrative burden and costs outweighing any true 
benefit to the customer.''); Wells Fargo Letter (``such a broad 
statement will add no value'').
    \586\ See Wells Fargo Letter (arguing that the statement will 
lead clients to draw unfair conclusions about both the firm and its 
financial professionals); New York Life Letter (arguing that the 
statement prejudices larger, established firms that will usually 
have a small number of disclosure events to report for current or 
former registered representatives); ACLI Letter (same).
    \587\ See Wells Fargo Letter; New York Life Letter; ACLI Letter.
---------------------------------------------------------------------------

    We recognize that the disciplinary history of firms and their 
financial professionals is already publicly available, as commenters 
have noted. From studies and investor feedback, however, we also 
understand that investors view disciplinary history as significant to 
their decision of whether or not to engage with a firm or a financial 
professional, but in many cases are unaware of the need for researching 
or the tools available to research whether disciplinary history 
exists.\588\ Highlighting disciplinary history in this way provides 
information to retail investors before they enter into a relationship 
with a particular firm and financial professional and a ``yes'' 
response will alert retail investors that there is disciplinary history 
they may want to research, review, or discuss with their financial 
professional.\589\ As there is no required waiting period between the 
delivery of the relationship summary to the retail investor and the 
time that the retail investor may enter into a relationship with or an 
order placed by a firm, highlighting the disciplinary information 
allows the retail investor time to consider any disciplinary history 
before moving forward or to monitor the relationship or financial 
professional more closely if the retail investor decides to move 
forward at that time. By basing this disclosure on information that is 
already reported elsewhere and also requiring the relationship summary 
to include details about where to find more information, we give retail 
investors the tools to learn more about firms and financial 
professionals.
---------------------------------------------------------------------------

    \588\ 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, at nn.317-19 and accompanying text, available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf (``917 Financial Literacy Study'') ([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); see also RAND 2018, supra footnote 13 (when investors 
were asked why they would not look up disciplinary history, 37 
percent of all respondents indicated that they did not know where to 
get the information, whereas 19 percent of all respondents indicated 
that it would take too much time or effort).
    \589\ See Miami Roundtable (investor noting that she had gone on 
Investor.gov to learn about the disciplinary history of her 
financial professional and noting that she was ``happy when [she] 
checked'' the website).
---------------------------------------------------------------------------

    We are not persuaded by commenters who believed that these 
disclosures are unduly prejudicial or would have sufficient competitive 
concerns and argued that we should not require this information. Firms 
or financial professionals would have the opportunity to provide more 
information about and encourage retail investors to ask follow-up 
questions regarding the nature, scope, or severity of any disciplinary 
history, so that retail investors have the information they need to 
decide on a relationship. In particular, financial professionals who 
themselves have no disciplinary history can make clear that a ``Yes'' 
disclosure in response to the heading question relates to the firm and 
other personnel (if applicable) and not to them. While we recognize 
that larger firms might be more likely to respond affirmatively to this 
question than smaller firms, we have determined to require this 
disclosure because we believe that, on balance, the potential benefit 
to the retail investor of seeing at a glance whether a firm or its 
financial professionals have disciplinary history (which may encourage 
the investor to conduct further research or monitor the relationship or 
financial professional more closely) justifies requiring the 
disclosures notwithstanding the concerns raised by commenters,

[[Page 33539]]

particularly given the importance that commenters placed on 
disciplinary history.
    A few commenters suggested revisions to the specific events that 
would trigger a disciplinary event disclosure in the proposed 
relationship summary.\590\ We have considered these comments but have 
determined to adopt the triggers as proposed. As noted in the Proposing 
Release, those disclosable events are those that we believe may 
generally assist retail investors in evaluating the integrity of a firm 
and its financial professionals.\591\ Additionally, these triggering 
events are already disclosed on existing systems for other regulatory 
purposes. As such, there will not be additional regulatory burdens for 
a determination of disciplinary history for the purposes of the 
relationship summary.
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    \590\ See CFA Institute Letter I (``For parity and 
comparability, we suggest requiring that the specific events that 
would trigger disclosure under these requirements be the same for 
both investment advisers and broker-dealers''); Comment Letter of 
the Business Law Section of the State Bar of Texas, Investment Funds 
Committee (Aug. 7, 2018) (advocating that an investment adviser 
disclose that it has a disciplinary event only based on Item 9 of 
Part 2A of Form ADV, rather than both Items 9 and 11).
    \591\ See Proposing Release, supra footnote 5, at nn.271-73 and 
accompanying text.
---------------------------------------------------------------------------

    Different requirements between other aspects of Form ADV or Form BD 
and the relationship summary also could cause confusion and compliance 
uncertainty. One commenter suggested basing the relationship summary 
disciplinary disclosure around a standardized set of events that would 
trigger disclosures specific to the relationship summary.\592\ This 
approach may have led to advisers or broker-dealers having publicly 
listed disclosure events on BrokerCheck or IAPD yet answering ``No'' to 
a question of whether they or their financial professionals have legal 
or disciplinary history. We believe that result could have been 
confusing or misleading to retail investors. By contrast, the approach 
we adopt allows for consistency across public information as to whether 
or not a firm or financial professional has a disciplinary event and 
leverages existing disclosure reporting systems. We believe that this 
consistency justifies not adopting a standardized set of events 
triggering disclosure on the relationship summary. Furthermore, the 
statement encouraging retail investors to visit Investor.gov/CRS for 
more information will help retail investors to more easily learn and 
compare additional details from the firms themselves and from their 
existing disclosures.\593\
---------------------------------------------------------------------------

    \592\ See CFA Institute Letter I.
    \593\ Item 4.D. of Form CRS.
---------------------------------------------------------------------------

    Firms also will include the following conversation starter: ``As a 
financial professional, do you have any disciplinary history? For what 
type of conduct?'' \594\ This conversation starter is intended to take 
the place of a similarly worded key question.\595\ However, because 
this item's heading asks a similar question about disciplinary history 
with respect to the firm, we believe that the conversation starter 
would be most useful specifically with respect to the financial 
professional. This question will allow retail investors to assess that 
financial professional's disciplinary history as well as engage in 
further discussion about those events or any events applicable to the 
firm. In addition, this conversation starter is designed to encourage a 
discussion about any differences between the firm's disciplinary 
history and that financial professional's history, if applicable (e.g., 
if the financial professional has no disciplinary history while his or 
her firm has reportable discipline necessitating a ``Yes'' response to 
the heading question).
---------------------------------------------------------------------------

    \594\ Item 4.D.(ii) of Form CRS.
    \595\ See Proposed Item 8.8 of Form CRS (``Do you or your firm 
have a disciplinary history? For what type of conduct?''); see also 
supra Section II.A.4 (discussing removal of the ``Key Questions to 
Ask'' section).
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5. Additional Information
    At the end of the relationship summary, firms will state where the 
retail investor can find additional information about their brokerage 
or investment advisory services, as proposed.\596\ This information 
should be disclosed prominently at the end of the relationship summary. 
However, unlike the proposed relationship summary, the adopted 
instructions do not prescribe the different references that a broker-
dealer and investment adviser must include for such direction and do 
not require a heading for the section.\597\ This approach is consistent 
with our intent to provide firms additional flexibility to provide 
information most useful to retail investors.\598\ In addition, removing 
the prescribed wording from this section avoids potentially duplicative 
disclosure, as the Introduction now includes a statement that free and 
simple tools are available to research firms and financial 
professionals at Investor.gov/CRS. Investor.gov provides investors 
access to search for firms on BrokerCheck and IAPD, references to both 
of which would have been required in prescribed wording in the proposed 
relationship summary.\599\ The flexibility is also responsive to 
observations reported in surveys and studies and comments from 
investors at roundtables and on the Feedback Forms indicating that 
investors found the proposed ``Additional Information'' section less 
helpful compared to other sections in the relationship summary.\600\ 
Consistent with our layered disclosure approach, we encourage 
hyperlinks, QR codes, or other means of facilitating access for retail 
investors to obtain additional information.\601\
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    \596\ See Proposed Item 7.E. of Form CRS. We are also requiring 
a statement of where retail investors can request a copy of the 
relationship summary.
    \597\ As proposed, broker-dealers would have had to state that, 
to find additional information, retail investors should visit 
BrokerCheck, the firm's website, and the retail investor's account 
agreement. In addition, broker-dealers would link to a portion of 
their website with up-to-date information and a link to BrokerCheck. 
If the firm did not have a public website, the broker-dealer would 
have been required to include a toll-free telephone number where 
retail investors could request up-to-date information. See Proposed 
Item 7.E.1. of Form CRS.
     Investment advisers would have had to state that, to find 
additional information, retail investors should see the firm's Form 
ADV brochure on IAPD on Investor.gov and any brochure supplement the 
firm provides. If the adviser maintains its current Form ADV on a 
public website, it would have had to state the website address. If 
the adviser had no such website, a link to adviserinfo.sec.gov would 
have had to be provided as well as a toll-free telephone number 
where retail investors could request up-to-date information. See 
Proposed Item 7.E.2. of Form CRS.
    \598\ See supra footnotes 76-83 and accompanying text.
    \599\ See Item 1.A. of Form CRS. As discussed above, we are 
requiring firms to include the reference to Investor.gov/CRS in the 
Introduction in part to highlight to retail investors the ability to 
research firms and financial professionals as well as the ability to 
review educational materials at the website. See supra Section 
II.B.1.
    \600\ See supra footnote 568-569 and accompanying text; see also 
Philadelphia Roundtable (confusion regarding the difference between 
FINRA and the Commission as well as a statement that there are ``too 
many websites'' in the Additional Information section).
    \601\ See supra Section II.A.3.
---------------------------------------------------------------------------

    We also are not adopting the proposed requirement that firms 
include information on how retail investors should report complaints 
about their investments, investment accounts, or financial 
professionals in the relationship summary.\602\ While some

[[Page 33540]]

commenters supported including information on how retail investors 
could report complaints,\603\ others disagreed with this approach\604\ 
or suggested that it may not be information that is as critical at the 
beginning of a relationship.\605\ Commenters submitting their own mock-
ups of the relationship summary likewise took different approaches as 
to whether or not to include this information.\606\
---------------------------------------------------------------------------

    \602\ The proposal included the following instruction in the 
Additional Information 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, 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.'' 
Proposed Item 7.D. of Form CRS.
    \603\ See, e.g., NASAA Letter (suggesting that the Additional 
Information section be recast as ``Disciplinary History and Customer 
Rights and Remedies'' and include, among other things, a discussion 
of the legal rights and the remedies available to customers in the 
event of breach (including whether the customer will be subject to 
mandatory arbitration) and contact information for regulators where 
investors may file complaints or ask questions about disciplinary 
history); see also Philadelphia Roundtable (investor expressing that 
she would like to know where to file a complaint, but not realizing 
that the desired information was on the proposed relationship 
summary).
    \604\ See Wells Fargo Letter (``We also don't agree that Form 
CRS needs to get into details on how an investor can report a 
problem. Such a disclosure is outside of the overall purpose of the 
summary and will detract from both the readability and length of the 
document.'').
    \605\ See Trailhead Consulting Letter (``[T]his document is 
encouraged or required to be delivered prior to entering into a 
relationship or transaction, so hopefully problems have yet to 
occur. The account statements or investment adviser reports should 
include statements informing investors how to report a problem.''). 
But see Cetera Letter II (Woelfel) (86% of survey respondents 
strongly or somewhat agreed that ``how to report a problem with your 
investments'' was an important topic to be discussed in the 
relationship summary and 84% of survey respondents strongly or 
somewhat agreed that ``how to report a problem with a financial 
professional'' was an important topic; within a range of 88% to 81% 
of ratings for 9 different topics).
    \606\ Compare, e.g., LPL Financial Letter (including hyperlinks 
to BrokerCheck and IAPD in part ``to report a problem'' in mock-up) 
and IAA Letter I (no reference to problems or reporting complaints 
in mock-up).
---------------------------------------------------------------------------

    We are requiring a conversation starter in this part of the 
relationship summary, which incorporates and adapts a key question from 
the proposal: ``Who is my primary contact person? Is he or she a 
representative of an investment adviser or a broker-dealer? Who can I 
talk to if I have concerns about how this person is treating me?'' 
\607\ With required text features to highlight this conversation 
starter, as well as information from the Introduction to direct retail 
investors to Investor.gov/CRS, we believe that retail investors will be 
able to find information on who to contact and how to report a 
complaint to the firm at the appropriate time, and Investor.gov 
includes links to submit questions and complaints to the Commission. In 
light of the mixed feedback from commenters and the changes to the form 
designed to enhance flexibility and usability, we are not requiring 
firms to include more detailed information about submitting complaints, 
as proposed, to enable the disclosures in the relationship summary to 
focus on other information about the firm and its services.
---------------------------------------------------------------------------

    \607\ Item 5.C. of Form CRS. In comparison, the analogous 
proposed key question was ``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?'' Proposed Item 8.10 of Form CRS.
---------------------------------------------------------------------------

    We are also requiring firms to include a telephone number where 
retail investors can request up-to-date information and request a copy 
of the relationship summary.\608\ This differs from the proposal, which 
required only those firms that do not have a public website to include 
a toll-free number that retail investors may call to request 
documents.\609\ Some of the commenter mock-ups included a telephone 
number even though the firms maintained a public website.\610\ A 
commenter who recommended including a contact telephone number in the 
relationship summary did not specify that it must be toll-free and we 
received a mock-up with a placeholder for a telephone number that was 
not specifically toll-free.\611\
---------------------------------------------------------------------------

    \608\ Item 5.B. of Form CRS.
    \609\ See Proposed General Instruction 8.(a) to Form CRS.
    \610\ See, e.g., Fidelity Letter (mock-up) and Primerica Letter 
(mock-up).
    \611\ See IAA Letter I and Primerica Letter (mock-up).
---------------------------------------------------------------------------

    After consideration of these comments and mock-ups, we determined 
that all firms should include a telephone number in the relationship 
summary. We continue to believe it is important for retail investors to 
have firm contact information in the event that they would like to 
request disclosures and there is no public website for that firm that 
the investor may easily access. In addition, we anticipate that 
requiring all firms to include a telephone number will more readily 
accommodate retail investors who prefer communicating with firms over 
the phone and will facilitate their requests for up-to-date information 
and a copy of the relationship summary. If firms do not already have a 
toll-free telephone number, they will not be required to obtain one to 
comply with the requirements of the relationship summary. Firms will 
have the flexibility to decide whether or not the telephone number they 
provide in their relationship summary will be toll-free.
6. Proposed Items Omitted in Final Instructions
    The proposal included two sections that we are not adopting as 
separate sections in the relationship summary.\612\ As discussed above, 
the relationship summary will not include a separate section for ``Key 
Questions to Ask;'' instead, the topics covered by the proposed key 
questions will be integrated throughout the relationship summary as 
headings to items or as ``conversation starters.'' \613\
---------------------------------------------------------------------------

    \612\ In addition to the reasons discussed below, removing these 
sections also may help alleviate concerns from commenters that the 
proposed relationship summary was trying to ``do too much.'' E.g., 
Schwab Letter I; SIFMA Letter; Comment Letter of UBS Global Wealth 
Management (Aug. 7, 2018) (``UBS Letter''); see also AARP Letter 
(suggesting that the relationship summary be shortened to avoid 
``information overload''); CFA Institute Letter I (the proposed 
relationship summary is ``too wordy, lacks design elements that 
engage the reader, and, in many respects, is too nuanced for the 
average retail investor who is trying to understand the differences 
between broker-dealers and investment advisers'').
    \613\ See supra Section II.A.4.
---------------------------------------------------------------------------

    The relationship summary will also not include the Comparisons 
section for investment advisers and broker-dealers, as proposed. 
Standalone broker-dealers would have been required to include the 
following information, using prescribed wording, about a generalized 
retail investment adviser: (i) The principal type of fees; (ii) 
services investment advisers generally provide; (iii) the applicable 
legal standard of conduct; and (iv) certain incentives based on an 
investment adviser's asset-based fee structure. For standalone 
investment advisers, this section would have required them to include 
parallel categories of information regarding broker-dealers.\614\
---------------------------------------------------------------------------

    \614\ See Proposed Item 5 of Form CRS.
---------------------------------------------------------------------------

    Many commenters opposed including discussions comparing investment 
advisers and broker-dealers. Some commenters stated that it was 
inappropriate for the Commission to require firms to describe products 
and services that they do not offer and about which they may have 
limited or no expertise.\615\ Other commenters had concerns with the 
prescribed wording, which they said may increase investor confusion or 
be misleading with prescribed wording that would not reflect the likely 
relationship that an investor would have with a specific firm.\616\ 
Some commenters believed that the wording in the comparison section

[[Page 33541]]

favored broker-dealers over investment advisers.\617\ Others indicated 
that the comparisons should allow for discussions regarding insurance 
products.\618\ As an alternative, some commenters suggested that the 
Commission include the information intended for the proposed Comparison 
section on the Commission's website as educational material,\619\ and 
that firms could link to the educational material from their 
relationship summaries.\620\ Given such concerns and suggestions, a 
number of mock-ups did not include a comparison section.\621\
---------------------------------------------------------------------------

    \615\ See, e.g., ACLI Letter.
    \616\ See IAA Letter I (arguing that the wording of the section 
was ``too boilerplate'' and would prohibit firms from providing 
useful information about what the specific investor's relationship 
would be with a firm).
    \617\ See CFA Letter I (arguing that ``there are a number of 
statements . . . that many, if not most, advisers would likely 
object to'' in the prescribed wording); IAA Letter I.
    \618\ See New York Life Letter; Northwestern Mutual Letter.
    \619\ See IAA Letter I; Schnase Letter; Pickard Djinis and 
Pisarri Letter.
    \620\ See, e.g., SIFMA Letter; Schwab Letter I.
    \621\ See, e.g., IAA Letter I; SIFMA Letter; Schwab Letter I. 
Other mock-ups included a ``first level'' disclosure that involved 
generalized comparisons between investment advisers and broker-
dealers, with the relationship summary including firm-specific 
information. See LPL Financial Letter; Primerica Letter.
---------------------------------------------------------------------------

    Comments on Feedback Forms indicated that this section was less 
useful than other sections of the relationship summary; fewer 
commenters rated this section as either ``very useful'' or ``useful'' 
compared to the other sections of the relationship summary.\622\ Many 
narrative comments on Feedback Forms relating to this section (even 
from those who graded the section as ``useful'') indicated that these 
commenters did not find this section informative and wanted more 
information to help them compare firms.\623\ Feedback on this section 
from the RAND 2018 report and other surveys and studies was limited 
because the RAND 2018 report, and other surveys and studies, generally 
focused on the sample proposed dual registrant relationship summary. 
However, in a survey that focused on the standalone investment adviser 
relationship summary, most survey respondents indicated that this 
section was not useful in helping them to understand differences 
between firms.\624\
---------------------------------------------------------------------------

    \622\ Twenty-nine commenters (about 30%) on Feedback Forms rated 
the comparison section as ``Very Useful''; 39 (about 40%) rated it 
as ``Useful''; 17 (almost 20%) responded that they did not find this 
section useful or were unsure. See Feedback Forms Comment Summary 
(responses to Question 2(d), supra footnote 11).
    \623\ See, e.g., Anonymous07 Feedback Form (``Any example of how 
you use either or both for achieving goals''); Anonymous13 Feedback 
Form (``. . . list what is the same for both, as much is, then only 
list differences in separate columns. What I really want is what's 
the differences''); Brantley Feedback Form (``when is it best to use 
each type of account--maybe some examples''); Coleman Feedback Form 
(``. . . a word that suggests when one type of relationship would be 
more beneficial''); Hawkins Feedback Form (``There are so many 
different account types and investment options. More information 
needed''); Murphy Feedback Form (``Too complicated to follow''); 
Schreiner Feedback Form (``highlight differences'').
    \624\ See Betterment Letter I (Hotspex), supra footnote 18 (only 
23% of survey respondents indicated that the disclosure on a version 
of the sample proposed standalone adviser relationship summary 
helped them to understand how other investment firms differed from 
Betterment).
---------------------------------------------------------------------------

    We have determined not to require a separate Comparisons section in 
the relationship summary for broker-dealers and investment advisers 
that are not dual registrants. In lieu of the separate section with 
prescribed wording, the final instructions include several requirements 
that will help facilitate comparisons among firms. First, each 
relationship summary will be required to provide answers to the same 
questions in a standard order.\625\ Second, dual registrants will be 
required to provide either a combined relationship summary describing 
both brokerage and advisory services, presenting the information with 
equal prominence and in a manner that facilitates comparison of the two 
types of services or, alternatively, will be required to provide 
separate relationship summaries that clearly distinguish and facilitate 
comparison of the firm's brokerage and investment advisory 
services.\626\ Similarly, a firm that has an affiliate providing 
brokerage or advisory services may choose to prepare a single 
relationship summary, or two separate relationship summaries, 
discussing the services provided by both firms, but only if the 
relationship summary or summaries are designed in a manner that 
facilitates comparison of the brokerage and investment advisory 
services.\627\
---------------------------------------------------------------------------

    \625\ See supra Section II.A.2.
    \626\ See supra Section II.A.5. Additionally, and as noted 
above, firms that prepare two separate relationship summaries must 
deliver both relationship summaries to each retail investor with 
equal prominence and at the same time, without regard to whether the 
particular retail investor qualifies for those retail services or 
accounts. See id.; see also General Instruction 5.A. to Form CRS.
    \627\ See General Instruction 5.B.(i) to Form CRS.
---------------------------------------------------------------------------

    These changes enhance the relationship summary's usability and 
design and, we believe, will improve comparisons among firms by retail 
investors using the relationship summaries. The relationship summaries 
will have differentiated, firm-specific information in a comparable 
format as compared to the proposed approach of requiring prescribed and 
more generalized information. We believe this comparability and 
differentiation among firm relationship summaries will enhance 
usability for retail investors. In addition, removing the prescribed 
wording allows firms to describe their services and fees more 
accurately while simultaneously mitigating concerns commenters raised 
regarding potentially misleading or inappropriate prescribed wording. 
Investors seeking more general information about investment advisers 
and broker-dealers will know they can refer to educational materials 
that are available on the Commission's website, Investor.gov, and 
elsewhere for investor research and education, including Investor.gov/CRS, which the relationship summary's Introduction must reference.\628\
---------------------------------------------------------------------------

    \628\ See Item 1.B. of Form CRS.
---------------------------------------------------------------------------

C. Filing, Delivery, and Updating Requirements

    We are adopting the filing, delivery, and updating requirements 
with several modifications from the proposal. Firms will file copies of 
their relationship summaries with the Commission, will update the 
disclosures when the information becomes materially inaccurate, and 
will communicate any changes to retail investors who are existing 
clients or customers. The delivery requirements are designed to ensure 
a relationship summary is provided before or at the time a retail 
investor enters into a relationship with the firm and when changes are 
made to the services the firm provides.
    We made several modifications to the proposed requirements in 
response to comments, in order to make it easier for retail investors 
to discern changes in updated relationship summaries, streamline the 
filing requirements, and provide greater clarity regarding several of 
the delivery requirements. As described further below, some of the key 
revisions include:
     Broker-Dealer Initial Delivery Obligations. Broker-dealers 
will be required to deliver the relationship summary before or at the 
earliest of: (i) A recommendation of an account type, a securities 
transaction, or an investment strategy involving securities; (ii) 
placing an order for the retail investor; or (iii) the opening of a 
brokerage account for the retail investor, instead of before or at the 
time the retail investor first engages the broker-dealer's services, as 
proposed. We encourage delivery of the relationship summary to new or 
prospective clients or customers at the first possible opportunity, 
including the initial point of contact.
     Other Delivery Obligations. Firms will deliver the 
relationship summary to existing retail investor clients and customers 
before or at the time firms open a new account that is different

[[Page 33542]]

from the retail investor's existing account, as was proposed. In 
addition, firms will deliver the relationship summary when they 
recommend that the retail investor roll over assets from a retirement 
account, or when they recommend or provide a new service or investment 
outside of a formal account (e.g., variable annuities or a first-time 
purchase of a direct-sold mutual fund through a ``check and 
application'' process). In response to commenters' concerns, these 
changes are intended to replace the proposed instruction that firms 
deliver the relationship summary when making changes to an existing 
account that would ``materially change the nature and scope'' of the 
firm's relationship with the retail investor with more concrete 
delivery triggers.
     Highlighting Changes. In a change from the proposal, we 
are adding a requirement that firms delivering updated relationship 
summaries to existing clients or customers also highlight the most 
recent changes by, for example, marking the revised text or including a 
summary of material changes. This additional disclosure must be filed 
as an exhibit to the unmarked amended relationship summary (but would 
not be counted toward the two-page or four-page limit, as applicable).
     New Filing Requirements. As proposed, we are requiring 
that firms file the relationship summary using a text-searchable 
format. However, in response to comments received, we are also 
requiring that the filings contain machine-readable headings to enhance 
the ability to compare information submitted by different firms. Also 
in response to comments, which we solicited on this topic, we are 
changing the system that broker-dealers will use to file Form CRS from 
EDGAR, as proposed, to Web CRD[supreg]. Dual registrants will be 
required to file their relationship summaries using both IARD and Web 
CRD[supreg].
    Finally, we are revising the definition of retail investor to align 
more closely with the definition of ``retail customer'' in Regulation 
Best Interest. As discussed, below, we do not believe that this results 
in substantive changes in the definition as proposed.
1. Definition of Retail Investor
    For purposes of Form CRS, ``retail investor'' is defined as ``a 
natural person, or the legal representative of such natural person, who 
seeks to receive or receives services primarily for personal, family or 
household purposes.'' \629\ The proposal defined the term retail 
investor as ``a prospective or existing client or customer who is a 
natural person (an individual), including trusts or other similar 
entities that represent natural persons, even if another person is a 
trustee or managing agent.'' This definition was different from the 
definition of ``retail customer'' in proposed Regulation Best Interest 
\630\ because the relationship summary was intended for an earlier 
stage of the relationship between an investor and a financial 
professional, and we thought it would be beneficial for all natural 
persons to receive information to facilitate their account 
choices.\631\
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    \629\ General Instruction 11.E. to Form CRS.
    \630\ Compare Proposed Exchange Act rule 15l-1(b)(1) (defining 
retail customer to mean ``a person, or the legal representative of 
such person, who: (A) Receives a recommendation of any securities 
transaction or investment strategy involving securities from a 
broker, dealer, or a natural person who is an associated person of a 
broker or dealer; and (B) Uses the recommendation primarily for 
personal, family, or household purposes.'').
    \631\ Proposing Release, supra footnote 5, at Section II, at 
n.29.
---------------------------------------------------------------------------

    Many commenters recommended that we use a single definition for 
both ``retail investor'' and ``retail customer'' because consistent 
definitions would facilitate compliance and administrative 
efficiency.\632\ Commenters were concerned that differences between the 
definitions could result in a requirement to deliver the relationship 
summary to broker-dealer customers who may not be ``retail customers'' 
for purposes of Regulation Best Interest.\633\ Many commenters further 
recommended that the definitions of ``retail investor'' and ``retail 
customer'' should both be conformed to rules issued by FINRA, which use 
a net worth test to distinguish institutional and ``retail'' 
customers.\634\ Commenters also asked us to clarify that the 
relationship summary need not be delivered to certain professionals 
retained to represent a natural person \635\ and address whether 
participants in workplace retirement plans will be retail investors who 
should receive the relationship summary.\636\
---------------------------------------------------------------------------

    \632\ See Committee of Annuity Insurers Letter (``a standardized 
definition . . . would be more efficient and enable firms to more 
easily comply''); ICI Letter (``a single definition . . . would 
provide important administrative efficiencies, facilitate 
compliance, and avoid confusion''); see also Bank of America Letter; 
CFA Letter I; Cetera Letter I; Fidelity Letter; Comment Letter of 
Franklin Resources, Inc. (Aug. 6, 2018); Invesco Letter; Comment 
Letter of Morgan Stanley Smith Barney, LLC (Aug. 7, 2018) (``Morgan 
Stanley Letter''); Oppenheimer Letter; Comment Letter of Raymond 
James Financial (Aug. 7, 2018) (``Raymond James Letter''); SIFMA 
Letter; TIAA Letter; Transamerica Letter.
    \633\ See, e.g., SIFMA Letter; TIAA Letter.
    \634\ See, e.g., SIFMA Letter (referring to FINRA Rule 2210); 
Cetera Letter I; Investacorp Letter; Morgan Stanley Letter; TIAA 
Letter; UBS Letter; Wells Fargo Letter.
    \635\ E.g., Comment Letter of the American Bankers Association 
(Aug. 7, 2018) (``American Bankers Association Letter''); IAA Letter 
I; ICI Letter; Oppenheimer Letter; Prudential Letter; T. Rowe 
Letter; Wells Fargo Letter.
    \636\ E.g., Comment Letter of Empower Retirement (Aug. 2, 2018) 
(``Empower Retirement Letter''); Fidelity Letter; Comment Letter of 
Groom Law Group (Aug. 7, 2018) (``Groom Law Letter''); IAA Letter I; 
ICI Letter; IRI Letter; Invesco Letter; Comment Letter of the 
National Association of Government Defined Contribution Plans (Aug. 
7, 2018) (``NAGDA Letter''); Oppenheimer Letter; Comment Letter of 
SPARK Institute, Inc. (Aug. 7, 2018) (``SPARK Letter''); T. Rowe 
Letter.
---------------------------------------------------------------------------

    In response to comments, the final instructions adopt a definition 
of retail investor that is consistent with the definition of retail 
customer in Regulation Best Interest, but differs to reflect 
differences between the relationship summary delivery requirement and 
the obligations of broker-dealers under Regulation Best Interest, 
including that the relationship summary is required whether or not 
there is a recommendation and covers any prospective and existing 
clients and customers (i.e., a person who ``seeks to receive or 
receives services'') of investment advisers as well as broker-
dealers.\637\ Specifically, under Regulation Best Interest, retail 
customer will be defined as ``a natural person, or the legal 
representative of such natural person, who: (A) Receives a 
recommendation of any securities transaction or investment strategy 
involving securities from a broker, dealer, or a natural person who is 
an associated person of a broker or dealer; and (B) uses the 
recommendation primarily for personal, family, or household purposes.'' 
\638\ Like the definition of retail customer in Regulation Best 
Interest, the definition of retail investor in the final instructions 
includes natural persons \639\ who seek to receive or receive services 
``primarily for personal, family or household purposes'' and the 
``legal representatives of such natural persons.'' In addition, we 
provide an interpretation on who would be considered to be a ``legal 
representative'' for purposes of this definition.
---------------------------------------------------------------------------

    \637\ See Regulation Best Interest Release, supra footnote 47, 
at Section II.B.3.c.
    \638\ Exchange Act Rule 15l-1(b)(1).
    \639\ The proposed definition used the language ``a natural 
person (an individual).'' While the final definition excludes the 
parenthetical reference to ``an individual,'' we do not intend any 
substantive change because a reference to a natural person typically 
includes any individual.
---------------------------------------------------------------------------

    The proposed definition of retail investor did not include the 
phrase ``personal, family or household purposes.'' No commenters 
addressed whether or not to include this phrase in the Form CRS 
definition of retail investor, other than commenting

[[Page 33543]]

generally that they supported conforming both definitions. Commenters 
did comment and request clarification of this aspect of the definition 
of ``retail customer'' in Regulation Best Interest.\640\
---------------------------------------------------------------------------

    \640\ See Regulation Best Interest Release, supra footnote 47, 
at Section II.B.3a (describing comments).
---------------------------------------------------------------------------

    We believe the final definition of retail investor remains 
consistent with our objective to provide all natural persons with 
information to facilitate their understanding of their choices among 
firms and types of accounts. Firms will be required to deliver the 
relationship summary to individuals seeking brokerage and investment 
advisory services in connection with any of the many different reasons 
that an individual may seek these services, including, for example, 
retirement, education and other personal, family or household saving 
and investing objectives. The final definition of retail investor will 
exclude natural persons seeking these services for commercial or 
business purposes, such as, for example, where an employee seeks 
services for an employer or an individual seeks services for a small 
business or on behalf of another non-natural person entity such as a 
charitable trust. However, firms must deliver the relationship summary 
to natural persons who might be seeking services for a mix of personal 
and commercial or other non-personal purposes, such as a sole 
proprietor or small business owner who may engage a firm or financial 
professional for multiple accounts and for personal as well as business 
purposes. Where firms do not know whether a natural person is seeking 
services for something other than personal, family, or household 
purposes at the beginning of a relationship, they may treat that 
natural person as a retail investor for purposes of delivery of the 
relationship summary.\641\
---------------------------------------------------------------------------

    \641\ As explained in Regulation Best Interest Release, supra 
footnote 47, at Section II.B.3a, we interpret ``personal, family or 
household purposes'' as used in the definition of retail customer to 
mean any recommendation to a natural person for his or her account, 
and we believe that, pursuant to the Care Obligation of Regulation 
Best Interest, broker-dealers are able to obtain sufficient facts to 
determine the purpose for which a recommendation will be used.
---------------------------------------------------------------------------

    As in the proposal, the final retail investor definition will 
capture natural persons without any distinction based on net worth. 
While a number of commenters argued that firms should not be required 
to deliver a relationship summary to investors that meet certain asset 
or net worth thresholds,\642\ others opposed narrowing the definition 
based on a net worth test or other test.\643\ We continue to believe 
that the retail investor definition should not distinguish based on a 
net worth or other asset threshold test and that all individual 
investors would benefit from clear and succinct disclosure regarding 
key aspects of available brokerage and advisory relationships. As noted 
in the proposal, section 913 of the Dodd-Frank Act defines ``retail 
customer'' to include natural persons and legal representatives of 
natural persons without distinction based on assets or net worth.\644\ 
Further, we believe that it also may be impractical to include a net 
worth or other test based on asset thresholds in the definition because 
it could be difficult for firms to determine a retail investor's net 
worth at the outset of the relationship when the relationship summary 
must be provided.
---------------------------------------------------------------------------

    \642\ For example, SIFMA's comments refer to FINRA Rule 2210, 
which treats accounts of natural persons with $50 million or more in 
assets as institutional investors; SIFMA explains that these 
investors are ``among the wealthiest and most sophisticated 
customers and often have multiple professional fiduciaries and 
advisers, apart from their broker-dealer relationships'' and ``do 
not function as `retail customers' ''; see also Cetera Letter I; 
Investacorp Letter; Morgan Stanley Letter; TIAA Letter; UBS Letter; 
Wells Fargo Letter. Other commenters suggested different tests of 
financial sophistication, e.g., Advisers Act Rule 205-3 definition 
of ``qualified clients'' (a $2 million net worth test), see Comment 
Letter of American Investment Council (Aug. 7, 2018) (``American 
Investment Council Letter''); Comment Letter of Loan Syndications 
and Trading Association (Aug. 7, 2018); Comment Letter of the 
Managed Funds Association Alternative Investment Management 
Association (Aug. 7, 2018); or the section 2(a)(51) of the 
Investment Company Act definition of ``qualified purchaser'' ($5 
million net worth test). See Fidelity Letter; Pickard Djinis and 
Pisarri Letter.
    \643\ See, e.g., Morningstar Letter (``any unequal distribution 
of this information would be arbitrary''); see also AARP Letter; CFA 
Letter I; Trailhead Consulting Letter.
    \644\ Proposing Release, supra footnote 5, at Section II, at 
text accompanying nn.31-32.
---------------------------------------------------------------------------

    To conform definitions, the final definition of retail investor 
substitutes the language ``the legal representative of such natural 
person'' for language in the proposal referring to ``a trust or other 
similar entity that represents natural persons, even if another person 
is a trustee or managing agent of the trust.'' \645\ We believe this is 
a clarification and not a substantive change from the proposal because 
it retains coverage of trusts and other similar legal entities that 
represent natural persons, and the proposal contemplated that certain 
legal representatives, e.g., a trustee or managing agent, would receive 
a relationship summary on behalf of a trust or other similar legal 
entity. Further, we clarify that we interpret a ``legal 
representative'' of a natural person to cover only non-professional 
legal representatives (e.g., a non-professional trustee that represents 
the assets of a natural person and similar representatives such as 
executors, conservators, and persons holding a power of attorney for a 
natural person).\646\ In referring to non-professional legal 
representatives, we intend to capture persons who are acting on behalf 
of natural persons and are not regulated financial services 
professionals retained by natural persons to exercise independent 
professional judgment. This responds to those commenters who argued 
that it should not be necessary to provide a relationship summary to 
regulated professionals in the financial services industry, such as 
registered investment advisers and broker-dealers, corporate 
fiduciaries (e.g., banks, trust companies and similar financial 
institutions) and insurance companies, and the employees or other 
representatives of such advisers, broker-dealers, corporate fiduciaries 
and insurance companies.\647\ Accordingly, non-professional legal 
representatives would not include such regulated financial services 
professionals. We agree with these commenters that delivery of the 
relationship summary to such regulated financial services professionals 
retained by natural persons to exercise independent judgment will not 
further our objective of facilitating retail investors' understanding 
of their account choices.\648\ Importantly, however, this will not 
relieve firms or financial professionals retained to represent the 
assets of natural persons from their own obligations to deliver the 
relationship summary to clients or customers who are retail investors.
---------------------------------------------------------------------------

    \645\ General Instruction 11.E. to Form CRS.
    \646\ See ICI Letter (recommending that the Commission ``make 
explicit in the definition of `retail investor' that a `legal 
representative' of a natural person ``means an executor, 
conservator, or a person holding a durable power of attorney for a 
natural person'').
    \647\ See, e.g., American Bankers Association Letter; Bank of 
America Letter; IAA Letter I; Invesco Letter; ICI Letter; 
Oppenheimer Letter; Prudential Letter; T. Rowe Letter.
    \648\ See, e.g., American Bankers Association Letter; Bank of 
America Letter; IAA Letter I; Invesco Letter; ICI Letter; 
Oppenheimer Letter; Prudential Letter; T. Rowe Letter.
---------------------------------------------------------------------------

    Commenters offered varying points of view about whether 
participants of workplace retirement plans should be treated as retail 
investors who receive the relationship summary. Some recommended that 
the definition of retail investor should include plan 
participants.\649\ Others argued against

[[Page 33544]]

delivering a relationship summary to plan participants, explaining that 
a relationship summary would confuse participants and would duplicate 
other required disclosures.\650\ Several commenters suggested that only 
plan participants that choose to retain a firm or financial 
professional in connection with assets in his or her plan account 
should receive a relationship summary.\651\ Commenters also asked us to 
clarify whether the definition of retail investor would include 
participants in plans not subject to ERISA, such as governmental or 
other non-ERISA workplace retirement plans meeting requirements under 
section 403(b) or 457 of the Internal Revenue Code of 1986, as amended 
(``Internal Revenue Code'' or ``Code''), and individual retirement 
accounts (``IRAs'') (including SEPs and SIMPLE IRAs).\652\
---------------------------------------------------------------------------

    \649\ See ICI Letter; Invesco Letter; Oppenheimer Letter; 
Trailhead Consulting Letter; see also IRI Letter (permit delivery of 
Form CRS using media approved by the plan sponsor).
    \650\ See Empower Retirement Letter (noting that plans covered 
by ERISA ``have named fiduciaries responsible for ensuring each plan 
is operated in the best interest of plan participants . . . [and 
who] are already obligated pursuant to ERISA Sec.  404a-5 to provide 
participants with detailed disclosures related to those investment 
choices.''); Groom Law Letter (noting that ``the decision to engage 
a broker-dealer for purposes of providing services to the plan is 
made at the plan sponsor level and not at the participant level); 
Comment Letter of Principal Financial Group (Aug. 7, 2018) 
(``Principal Letter'').
    \651\ See T. Rowe Letter (noting that Form CRS should apply ``if 
an individual chooses to retain a broker-dealer or advisor to 
provide recommendations or management regarding his or her 
retirement plan accounts . . . [but] ``if a plan fiduciary selects a 
broker-dealer or adviser to provide such services to its plan 
participants . . . we do not think Form CRS should apply); 
Prudential Letter; SPARK Letter.
    \652\ See ICI Letter; Invesco Letter; Oppenheimer Letter; T. 
Rowe Letter.
---------------------------------------------------------------------------

    In response to comments, we are clarifying that the relationship 
summary applies when retail investors seek services for their 
retirement accounts as well as non-retirement accounts because 
retirement savings is a personal, household or family purpose. 
Accordingly, the definition of retail investor will include a natural 
person seeking to select and retain a firm to provide brokerage or 
advisory services for his or her own retirement account, including but 
not limited to IRAs and individual accounts in workplace retirement 
plans, such as 401(k) plans and other tax-favored retirement 
plans.\653\ For example, firms will be required to deliver a 
relationship summary to plan participants seeking advice about whether 
to take a distribution from a 401(k) plan or other workplace retirement 
plan and how to invest that distribution. Similarly, a firm will be 
required to deliver a relationship summary to a plan participant 
seeking to retain the firm to provide brokerage or advisory services 
for the participant's individual account held in a 401(k) plan or other 
workplace retirement plan.\654\
---------------------------------------------------------------------------

    \653\ Such IRAs include, for example, individual retirement 
accounts and individual retirement annuities described by section 
408(a) and (b) of the Internal Revenue Code, ``simplified employee 
pensions'' (or (SEPs) described by section 408(k) of the Code, and 
simple retirement accounts described by section 408(p) of the Code 
(SIMPLE IRAs). In response to commenters, we also clarify that 
workplace retirement plans include any arrangement available at a 
workplace that provides retirement benefits or allows saving for 
retirement, including, for example, any 401(k) plan or other plan 
that meets requirements for qualification under Code section 401(a), 
deferred compensation plans of state and local governments and tax-
exempt organizations described by Code section 457, and annuity 
contracts and custodial accounts described by Code section 403(b). 
Likewise, the definition of retail investor includes natural persons 
seeking brokerage or advisory services for other tax-favored savings 
arrangements such as an Archer Medical Savings Account described by 
Code section 220(d), a Health Savings Accounts described by Internal 
Revenue Code section 223(d) and any similar tax-favored health plan 
saving arrangement, a Coverdell education savings account described 
by Code section 530 and a qualified tuition program or ``529 plan'' 
established pursuant to Code section 529.
    \654\ For example, we understand that, although not common, some 
401(k) plans and other individual account plans provide participants 
total discretion to choose an investment adviser or broker-dealer to 
provide services for their individual plan account. See, e.g., 29 
CFR 2550.404c-1(f), Example 9.
---------------------------------------------------------------------------

    However, participants in 401(k) plans and other workplace 
retirement plans will not be retail investors for purposes of the Form 
CRS delivery obligation when making certain ordinary plan elections 
that do not involve selecting or retaining a firm to provide brokerage 
or advisory services. We understand, for example, that participants in 
workplace retirement plans generally do not choose the firm that 
provides brokerage or advisory services in connection with certain 
ordinary plan elections, such as whether to enroll in the plan, make or 
increase plan contributions, or how to allocate contributions and plan 
account balances among a designated menu of plan investment options. We 
designed the relationship summary to assist investors in understanding 
their choices when they seek to engage a firm to provide brokerage and 
advisory services. Even if a financial professional or other firm 
representative assists a participant directly, e.g., at an enrollment 
meeting or through a call center interaction, the participant generally 
would not be making the type of account or firm choice contemplated by 
a relationship summary because the plan's sponsor or another 
representative designated by the terms of the plan (e.g., a trustee or 
other fiduciary or other responsible party) (a ``plan representative'') 
already has selected the firm, has negotiated the terms of service, and 
remains responsible for supervising the firm.\655\ We agree with 
commenters that delivering a relationship summary under these 
circumstances could be confusing to participants and duplicative of 
already required disclosures. Accordingly, plan participants should not 
be viewed as ``seeking or receiving services'' for purposes of the Form 
CRS definition of retail investor when they are merely electing among 
plan features offered by firms and financial professionals retained and 
supervised by a plan representative. This includes a participant's 
decision to invest his or her account balance through an in-plan self-
directed brokerage account option or to select an in-plan managed 
account service option, where a plan representative retains and 
supervises the broker-dealer or investment advisory firm providing such 
services to the plan.
---------------------------------------------------------------------------

    \655\ This approach differs from our approach to defining retail 
customer for purposes of Regulation Best Interest to recognize 
differences between the relationship summary requirement and the 
obligations of broker-dealers under Regulation Best Interest. As 
discussed in the Regulation Best Interest Release, supra footnote 
47, at Section II.B.3.a, a participant receiving recommendations for 
the participant's individual account held in a 401(k) or other 
workplace retirement plan would be a retail customer for purposes of 
Regulation Best Interest.
---------------------------------------------------------------------------

    Finally, commenters asked us to address whether workplace 
retirement plans and their representatives (e.g., plan sponsors, 
trustees, and other fiduciaries) and service providers will be retail 
investors entitled to receive Form CRS. In the proposal, we excluded 
workplace retirement plans and their representatives from the 
definition of retail investor.\656\ Most commenters agreed with this 
approach; some noting that workplace retirement plans and their 
representatives would not benefit from receiving a Form CRS.\657\ Two

[[Page 33545]]

commenters argued that workplace retirement plans and their 
representatives should receive Form CRS.\658\
---------------------------------------------------------------------------

    \656\ Proposing Release, supra footnote 5, at Section II.
    \657\ See IAA Letter I (``Institutional trusts such as employee 
benefit or pension plans . . . would not benefit from a Form CRS''); 
T. Rowe Letter (``. . . where a plan fiduciary selects a broker-
dealer or adviser to provide such services to its plan participants 
. . . we do not think Form CRS should apply. ERISA and governmental 
plans are already subject to extensive disclosures to participants 
and rules related to conflicts. Consequently, a Form CRS in this 
context would be duplicative of existing disclosures and cause 
potential confusion, without providing any additional benefits''); 
see also Comment Letter of the American Retirement Association (Aug. 
3, 2018) (professional investment experts retained by a plan to 
perform investment advisory services in a fiduciary capacity should 
not be included); Fidelity Letter (``establish a uniform definition 
. . . [that] excludes ERISA and non-ERISA employer sponsored 
retirement plans regardless of size, as well as their sponsors, 
trustees and advisers . . .''); ICI Letter (a retail investor should 
not include retirement plans, their sponsors or trustees or plan 
fiduciaries); NAGDA Letter (requesting clarification); Prudential 
Letter (```retail investor' for purposes of Form CRS should not 
include retirement plan representatives''); Transamerica Letter 
(same).
    \658\ See Comment Letter of Fisher Investments (Dec. 13, 2018) 
(``many individuals overseeing retirement plans . . . would benefit 
from a better understanding of concepts in proposed Form CRS''); 
Trailhead Consulting Letter.
---------------------------------------------------------------------------

    We understand that plan representatives of workplace retirement 
plans typically are not seeking or receiving services primarily for 
personal, family or household purposes when they consider whether to 
engage a broker-dealer or investment adviser to provide services to a 
retirement plan established, maintained and operated by an employer to 
provide pension or retirement savings benefits to employees. Further, 
the relationship summary--designed to provide succinct information 
relevant to individual retail investors--is not designed to facilitate 
account and firm choices by the representatives of these workplace 
retirement plans. In this regard, we understand that plan 
representatives typically seek brokerage and advisory services bundled 
together with, or that will be complimentary with, other services 
supporting the plan's establishment, maintenance and operation, such as 
plan design, recordkeeping and other administrative services, and 
compliance services to meet applicable requirements under the Internal 
Revenue Code and ERISA (or applicable state law for non-ERISA 
governmental plans).\659\
---------------------------------------------------------------------------

    \659\ See, e.g., Groom Law Letter (describing business models of 
firms offering brokerage and advice services to plans together with 
other services); SPARK Letter (same).
---------------------------------------------------------------------------

    Accordingly, the final definition of retail investor does not 
include most workplace retirement plans or their plan representatives 
seeking services for a plan established, maintained and operated by an 
employer to provide pension or retirement savings benefits to 
employees, because such plans and their representatives are not seeking 
services primarily for personal, family or household purposes. We note, 
however, that some plan representatives may participate under their 
employer's workplace plan, e.g., in the case of a workplace IRA or 
other workplace retirement plan is established and maintained by a sole 
proprietor or other self-employed individual that includes one or more 
employees in addition to the plan representative. If a plan 
representative who decides the services arrangements for a workplace 
retirement plan is a sole proprietor or other self-employed individual 
who will participate in the plan, the plan representative also would be 
a retail investor seeking services for personal, family or household 
purposes and must receive a copy of the firm's relationship 
summary.\660\
---------------------------------------------------------------------------

    \660\ This is consistent with the final definition of retail 
customer for purposes of Regulation Best Interest, which to the 
extent that the plan representative who decides services 
arrangements is a sole proprietor or other self-employed individual 
who will participate in the plan, the plan representative will be a 
retail customer for purposes of Regulation Best Interest to the 
extent that the plan representative receives recommendations 
directly from a broker-dealer primarily for personal, family or 
household purposes. See Regulation Best Interest Release, supra 
footnote 47, at Section II.B.3a.
---------------------------------------------------------------------------

2. Filing Requirements
    As proposed, all broker-dealers and investment advisers will file 
their relationship summaries with the Commission, and the relationship 
summaries will be accessible via the Commission's public website, 
Investor.gov,\661\ in addition to each firm's website. There are 
several reasons we are requiring the relationship summaries to be filed 
with the Commission. First, the public will benefit by being able to 
access any firm's relationship summary by using one website, 
Investor.gov. This should make it easier to make comparisons across 
firms. Second, some firms may not maintain a website, and therefore 
their relationship summaries will not otherwise be accessible to the 
public. Third, by having firms file their relationship summaries with 
the Commission, Commission staff can more easily monitor the filings 
for compliance. Commenters generally supported requiring broker-dealers 
and investment advisers to file their relationship summaries with the 
Commission.\662\
---------------------------------------------------------------------------

    \661\ For broker-dealers, relationship summaries will be filed 
through Web CRD[supreg], and for investment advisers, relationship 
summaries will be filed through IARD. Investors will be able to 
access relationship summaries using BrokerCheck and IAPD, the public 
interfaces of Web CRD[supreg] and IARD, respectively, and through 
the Commission's Investor.gov website, which has a search tool that 
links to both BrokerCheck and IAPD.
    \662\ See, e.g., CFA Letter I; Schnase Letter; Trailhead 
Consulting Letter; Institute for Portfolio Alternatives Letter.
---------------------------------------------------------------------------

    We are requiring that the filing be in a text-searchable format, as 
proposed, and in addition, the final instructions will require that the 
filing be structured with machine-readable headings. Two commenters 
advocated that the relationship summary should be filed not only in a 
text-searchable, but also machine-readable, format,\663\ in response to 
our solicitation for comment on filing formats. Both commenters stated 
that this would allow third parties to develop online comparison tools, 
making it easier for retail investors to compare firms with one 
another, including across key categories, such as fees.\664\ We agree 
that requiring this formatting will enable investors and other data 
users, industry participants, and the Commission and Commission staff 
to better collect and analyze reported information and facilitate the 
development of tools to aggregate and compare the information. We are 
requiring that only the headings be machine-readable, given that firms 
will use their own wording in the narrative responses for each of the 
relationship summary items, and the responses will not be uniform. The 
machine-readable, structured headings could, for example, be 
implemented in PDF by creating a bookmark for each of the headings of 
the relationship summary that matches the text of the heading and that 
has the heading as its destination. We believe this promotes 
aggregation and comparison of responses to specific items across 
different relationship summaries but also limits the costs of preparing 
the relationship summary. This is consistent with the Commission's 
ongoing efforts to modernize our forms by taking advantage of 
technological advances both in the manner in which information is 
reported to the Commission and how it is provided to investors and 
other users.\665\ These

[[Page 33546]]

instructions are not intended to require firms to prepare a 
relationship summary in paper format. A firm that prepares and delivers 
a relationship summary only in an electronic format could, for example, 
file a rendering of the electronic disclosures with the Commission.
---------------------------------------------------------------------------

    \663\ See CFA Letter I (``[P]ast experience regarding investors' 
limited use of existing databases, such as IARD and BrokerCheck, 
cautions against placing too much reliance on investors' accessing 
the documents directly. We therefore urge the Commission to require 
that the documents be filed, not just in a text-searchable format, 
but in a machine-readable format.''); Schnase Letter (``[T]he data 
contained in the Relationship Summary should be required to be filed 
in a structured data format, so the document can be utilized as a 
stand-alone human-readable document and serve as the source for a 
machine-readable data set.'').
    \664\ CFA Letter I (``We can envision a time when third parties 
could develop online tools to help investors search for a firm or 
account that meets their preferred parameters, much like the tools 
Kelly Blue Book or Edmunds provide to help car buyers narrow their 
selections.''); Schnase Letter (``Retail investors may not be able 
or inclined to build their own algorithms and spreadsheets to 
manipulate machine-readable data themselves, but third-party 
providers will likely step in when demand exists to provide 
investors publicly accessible comparison tools fueled by the 
machine-readable data made available by the SEC.'').
    \665\ See, e.g., Inline XBRL Filing of Tagged Data, Advisers Act 
Release No. 10514 (Jun. 28, 2018) [83 FR 40846] (Aug. 16, 2018); 
Optional internet Availability of Investment Company Shareholder 
Reports, Investment Company Act Release No. 33115 (Jun. 5, 2018) [83 
FR 29158] (Jun. 22, 2018) (``Shareholder Reports Release''); 
Investment Company Reporting Modernization, Investment Company Act 
Release No. 32314 (Dec. 8, 2017) [82 FR 58731 (Dec. 14, 2017)].
---------------------------------------------------------------------------

    In a change from the proposal, broker-dealers will file through Web 
CRD[supreg] instead of EDGAR. Investment advisers will file their 
relationship summaries through IARD in the same manner as they 
currently file Form ADV Parts 1A and 2A, as proposed.\666\ Whether dual 
registrants prepare a single relationship summary or two, they will 
file their relationship summaries using both IARD and Web 
CRD[supreg].\667\ We are requiring filing of the relationship summary 
through Web CRD[supreg] and IARD because they are currently used by and 
familiar to broker-dealers and investment advisers, respectively. This 
should minimize the systems changes firms would need to make, because 
they would not need to establish new systems in order to file their 
relationship summaries with the Commission. One commenter supported 
using EDGAR for analyzing and comparing fee information.\668\ Several 
commenters, however, generally preferred Web CRD[supreg], arguing that 
Web CRD[supreg] is more accessible for broker-dealers, which already 
make filings through Web CRD[supreg], and that Web CRD[supreg] data 
provided on BrokerCheck is more familiar to retail investors.\669\ In 
light of comments, we have determined that requiring broker-dealers to 
file their relationship summaries through Web CRD[supreg] should 
streamline broker-dealer filing requirements relative to requiring 
broker-dealers to file on EDGAR. Broker-dealers already use Web 
CRD[supreg] for filing their own registration records and those of 
their associated persons, and retail investors already can find broker-
dealers' disciplinary history and other information on BrokerCheck. In 
addition, Investor.gov already has a prominent search tool on its main 
landing page that links to BrokerCheck and IAPD, which investors can 
use to search for information about firms and financial professionals. 
This minimizes the implementation changes needed to make relationship 
summaries easily accessible through Investor.gov because new search 
tools would not need to be created and existing search tools could be 
linked to the Investor.gov/CRS web page referenced in the relationship 
summary.
---------------------------------------------------------------------------

    \666\ General Instruction 7.A.(i) to Form CRS. Several 
commenters supported using IARD as the filing system for investment 
advisers. See, e.g., Trailhead Consulting Letter; Schnase Letter. 
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.
    \667\ General Instruction 7.A.(i) to Form CRS. Information for 
investment advisers on how to file with IARD is available on the 
SEC's website at www.sec.gov/iard. Information for broker-dealers on 
how to file through Web CRD[supreg] is available on FINRA's website 
at https://www.finra.org/industry/web-crd/web-crd-system-links. See 
General Instruction 7.A.(ii) to Form CRS.
    \668\ See Morningstar Letter (advocating for fee information to 
be filed in a standard table with brief examples ``in the EDGAR 
system in a standardized data format facilitating analysis and 
comparison'').
    \669\ See Schnase Letter (``[I]t is not clear why BDs should be 
filing their Relationship Summary through a different filing system 
than IAs (IARD, which is operated by FINRA) and through a different 
filing system than BDs already use for Form BD (CRD, also operated 
by FINRA).''); NASAA Letter (``[B]roker-dealers should file Form CRS 
on the WebCRD platform maintained by FINRA for its BrokerCheck 
reports (and which is related to IARD).''); Institute for Portfolio 
Alternatives Letter (``CRD and its public-facing BrokerCheck is a 
system familiar to both the brokerage industry as well as investors. 
We believe that CRD/BrokerCheck will address potential investor 
confusion and streamline broker requirements.'').
---------------------------------------------------------------------------

    We also received comment that dual registrants should file only on 
one system, instead of on both EDGAR and IARD as proposed.\670\ One 
commenter, however, implicitly supported the requirement that dual 
registrants file on two systems.\671\ The final instructions require 
dual registrants to file their relationship summaries using both 
systems--Web CRD[supreg] and IARD.\672\ This approach ensures a 
complete and consistent filing record for each firm and facilitates the 
Commission's data analysis, examinations, and other regulatory efforts. 
Firms offering brokerage or investment advisory services through 
affiliates will follow the same filing requirements as standalone 
firms.
---------------------------------------------------------------------------

    \670\ See, e.g., Prudential Letter (``The Commission should 
clarify that a single filing [for dual registrants], in either IARD 
or EDGAR, would constitute compliance with the filing 
requirement.'').
    \671\ See Schwab Letter III (providing sample Form CRS 
instructions for dual registrants to file on IARD and EDGAR).
    \672\ General Instruction 7.A.(i) to Form CRS.
---------------------------------------------------------------------------

    For investment advisers, we are also adopting clarifications in the 
General Instructions to Form ADV that relate to the amending and filing 
of the relationship summary.\673\ First, investment advisers may file 
an amended relationship summary as an other-than-annual amendment or by 
including the relationship summary as part of an annual updating 
amendment, within the 30 days in which they are required to file the 
amendment.\674\ Second, the instructions provide that advisers may, but 
are not required to, submit amended versions of their relationship 
summary as part of their annual updating amendment and include 
additional technical references to implement this instruction.\675\ 
Third, we added provisions to mirror the requirements of the General 
Instructions to Form CRS as to when amendments and exhibits showing 
changes to Part 3 must be made and filed.\676\ We believe that 
investment advisers will benefit from these clarifications. Finally, we 
are adopting certain amendments to the General Instructions to Form ADV 
to add conforming technical changes and references to the Form ADV, 
Part 3.\677\
---------------------------------------------------------------------------

    \673\ See infra Section II.C.4 generally for a discussion of 
amendments to the relationship summary.
    \674\ See amended General Instruction 4 to Form ADV (revised to 
add the following language: ``If you are registered with the SEC, 
you must amend Part 3 of your Form ADV within 30 days whenever any 
information in your relationship summary becomes materially 
inaccurate by filing with the SEC an additional other-than-annual 
amendment or by including the relationship summary as part of an 
annual updating amendment.''). Compare Proposed General Instruction 
4 to Form ADV (``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.'').
    \675\ See amended General Instruction 4 to Form ADV (revised 
with language that investment advisers must update responses to all 
items ``in Part 1A, 1B, 2A and 2B (as applicable),'' and ``You may, 
but are not required, to submit amended versions of the relationship 
summary required by Part 3 as part of your annual updating 
amendment.'').
    \676\ See infra footnotes 769-774, 781-783, and accompanying 
text.
    \677\ See amended General Instruction 3 to Form ADV (indicating 
that Form ADV, as amended to add Part 3, now contains five instead 
of four parts); amended General Instruction 4 to Form ADV (``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 accordance with the 
requirements of Part 3 of Form ADV. See Advisers Act Rule 203-1.''); 
amended General Instruction SEC's Collection of Information section 
(removing ``promptly'' to reflect filing requirements for 
relationship summary changes).
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3. Delivery Requirements
a. Form of Delivery
    The final instructions provide, as proposed, that firms will be 
able to deliver the relationship summary (including updates) within the 
framework of the Commission's existing guidance regarding electronic 
delivery.\678\ This framework consists of

[[Page 33547]]

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.\679\ In 
the Proposing Release, we also provided proposed guidance that 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, and that this method of initial delivery for the 
relationship summary would be consistent with the Commission's 
electronic delivery guidance.\680\ We have included this provision in 
the final instructions to provide additional clarity and certainty on 
what is permissible for initial delivery of the relationship 
summary.\681\ This approach applies only to the initial delivery of the 
relationship summary to new or prospective clients or customers, and 
not to any other delivery obligation of any other required disclosure. 
With respect to existing clients or customers, as proposed, 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's electronic delivery guidance. The above delivery 
instructions are based on the assumption that retail investors are able 
to access and prefer to receive communications and disclosures through 
the same medium in which they request information from the firm or 
financial professional. If this assumption is not correct, retail 
investors can request a copy of the relationship summary in a format 
they prefer, as discussed below, and can establish their delivery 
preferences with the firm once they have entered into a relationship.
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    \678\ 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''). Recognizing the growth of 
different forms of electronic media, other technological 
developments, and the passage of time since these releases were 
issued, the Commission plans to revisit its existing guidance 
regarding electronic delivery.
    \679\ 96 Guidance, supra footnote 678.
    \680\ See Proposing Release, supra footnote 5, at nn.344-45 and 
accompanying text; see also 2000 Guidance, supra footnote 678, at 65 
FR 25845-46; 96 Guidance, supra footnote 678, at 61 FR 24647; and 95 
Guidance, supra footnote 678, at 60 FR 53461.
    \681\ General Instruction 9.B. to Form CRS (``You may 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 you or your financial professional.'').
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    Numerous commenters expressed support for electronic delivery, 
including for modifications to the instructions to make electronic 
delivery a more accessible option for the relationship summary as well 
as other disclosures.\682\ A number of commenters further advocated for 
the ``notice plus access'' model, in which posting the relationship 
summary to the firm's website, in combination with a notice to the 
retail investor that the relationship summary is available there, would 
constitute delivery.\683\ Some of these commenters argued that this 
approach should suffice for delivery, even if the retail investor had 
not previously consented to electronic delivery in an affirmative 
way.\684\ A few commenters cited to the Commission's recently adopted 
rule 30e-3 under the Investment Company Act \685\ as a possible model 
for delivering the relationship summary.\686\ Some of these commenters 
also advocated for a more comprehensive updating of the Commission's 
guidance concerning electronic delivery, not just for the relationship 
summary but for other disclosures as well.\687\ Commenters advocating 
for more widespread use of electronic delivery cited to arguments 
including the potential cost savings and improved security of delivery 
to investors.\688\
---------------------------------------------------------------------------

    \682\ See, e.g., CFA Institute Letter I (``Whatever design is 
finalized for CRS, it should accommodate electronic delivery to 
investors. We also believe a design with interactive components is 
needed in today's electronically savvy investor base.''); TIAA 
Letter (``the SEC could make the disclosure requirements in . . . 
Form CRS more flexible, such that broker-dealers have more options 
with respect to the method of delivery of required disclosures. . . 
.''); MassMutual Letter; SIFMA Letter; SPARK Letter; Morgan Stanley 
Letter; Cetera Letter II; Fidelity Letter.
    \683\ See, e.g., Primerica Letter; Cetera Letter II; Schwab 
Letter (advocating a notice plus access model for annual or more 
frequent updates to the relationship summary); Pickard Djinis and 
Pisarri Letter; IAA Letter I; SIFMA Letter; MassMutual Letter; 
Comment Letter of the Money Management Institute (Aug. 7, 2018) 
(``MMI Letter''); Wells Fargo Letter.
    \684\ See, e.g., LPL Financial Letter (supporting an implicit 
consent model on the basis that, among other things ``It simply is 
not feasible to obtain an investor's affirmative consent to 
electronic delivery before the investor makes a final decision about 
the [investment relationship]''); FSI Letter I (supporting a 
negative consent model, rather than an opt-in approach); IAA Letter 
I (supporting an implied consent model).
    \685\ 17 CFR 270.30e-3 (internet availability of reports to 
shareholders); Shareholder Reports Release, supra footnote 665.
    \686\ See, e.g., T. Rowe Letter (``In cases where no email 
address is on file with the firm, we think a notice and access 
protocol akin to Rule 30e-3 is appropriate.''); SPARK Letter (``The 
SEC has recently demonstrated a willingness to embrace electronic 
disclosure as the default delivery method for other disclosures and 
we encourage the SEC to consider whether the disclosures added by 
the SEC's Proposal, including Form CRS, should be able to tap into 
the benefits of electronic delivery.'').
    \687\ See, e.g., LPL Financial Letter (``Modern communication 
practices underscore the need for the Commission to provide more 
flexibility to broker-dealers and investment advisers to satisfy 
their document delivery obligations by delivering materials to 
customers and clients who have implicitly consented to electronic 
delivery as well as to current customers and clients who have 
affirmatively consented to electronic delivery in a manner 
contemplated by the existing guidance.''); SPARK Letter (``strongly 
urges the SEC to permit . . . electronic delivery as the default 
delivery method for satisfying the disclosure requirements under 
[Regulation Best Interest, as well as Form CRS].''); Cetera Letter 
II (``We believe that adoption of Reg. BI and the Form CRS 
represents something of a watershed moment. . . .''); Pickard Djinis 
and Pisarri Letter; IAA Letter I; MMI Letter.
    \688\ See, e.g., Cetera Letter II (asserting that electronic 
delivery is safer and more environmentally friendly); IRI Letter; 
SPARK Letter; Primerica Letter.
---------------------------------------------------------------------------

    On the other hand, some commenters expressed reservations about a 
notice plus access equals delivery approach and supported the 
Commission's proposed approach.\689\ The RAND 2018 survey and another 
investor survey also showed mixed results relating to electronic 
delivery, with many participants indicating that they would prefer to 
receive the disclosures in paper.\690\ Similarly, the IAC has stated 
that nearly half of investors (49%) still prefer to receive paper 
disclosures through the mail, compared with only 33% who prefer to 
receive disclosures electronically, either through email (27%) or by 
accessing them online (6%).\691\ Additionally, we are aware,

[[Page 33548]]

based on our filing data, that a number of firms do not host public 
websites and would not be able to make available an updated, electronic 
version of their relationship summary for their retail investors at all 
times.\692\ Some commenters noted that some retail investors may lack 
readily available internet access.\693\
---------------------------------------------------------------------------

    \689\ CFA Letter I (``We greatly appreciate that, in discussing 
this issue, the Release specifically references the obligation to 
provide `evidence to show delivery.' This should help to clarify 
that firms could not meet the disclosure requirement simply by 
making the disclosures accessible on a public website and providing 
notice of their availability, under an `access equals delivery' 
model. . . .''); AARP Letter (``The SEC should prohibit advisers 
from simply providing an electronic address for disclosures. . . . A 
paper copy should be provided to the retail investor.'').
    \690\ See supra footnote 699.
    \691\ IAC Electronic Delivery Recommendation, supra footnote 153 
(citing FINRA Investor Education Foundation, Investors in the United 
States 2016 (Dec. 2016), available at https://www.usfinancialcapability.org/downloads/NFCS_2015_Inv_Survey_Full_Report.pdf). While the FINRA 2016 
Investors Study was conducted prior to the Form CRS proposal (and 
does not specify what disclosure materials are contemplated in the 
survey, e.g., shareholder reports, summary prospectuses, statutory 
prospectuses, account statements, etc.), it presents general 
investor survey data regarding investor disclosure preferences.
    \692\ Based on IARD system data, 8.4% of investment advisers 
with individual clients do not report at least one public website.
    \693\ See, e.g., Comment Letter of C. Frederick Reish (Sept. 12, 
2018); SIFMA Letter (acknowledging that firms would need to provide 
linked disclosures to customers and prospective customers who do not 
have internet access); LPL Financial Letter (citing Investment 
Company Institute, 2015 Investment Company Fact Book, (55th ed. 
2015), at 129, available at https://www.ici.org/pdf/2015_factbook.pdf. The study found the following with respect to 
internet access in mutual fund owning households: (i) Head of 
household age 65 or older, 14% lack access; (ii) education level of 
high school diploma or less, 16% lack access; and (iii) household 
income of less than $50,000, 16% lack access.).
---------------------------------------------------------------------------

    The relationship summary is designed to be delivered when a retail 
investor selects a firm or financial professional and which services to 
receive, including updated versions upon certain events when retail 
investors are again making decisions about whether to invest through an 
advisory account or a brokerage account. These selections affect all of 
the retail investor's subsequent investments under that relationship. 
In comparison, documents such as shareholder reports and prospectuses 
typically relate to investment decisions on single products; once the 
product is purchased, reporting is most commonly delivered at regular 
intervals, unlike the relationship summary. We are preserving an 
investor's ability to receive the relationship summary in paper, by 
maintaining the protections provided by the Commission's electronic 
delivery guidance.\694\
---------------------------------------------------------------------------

    \694\ See supra footnote 678.
---------------------------------------------------------------------------

    We recognize the benefits to retail investors of receiving the 
relationship summary as early as possible when considering a firm or 
financial professional and that electronic communication can facilitate 
earlier delivery, provided that retail investors can readily access the 
form of communication used. As noted above, we have adopted the 
instruction that delivery of the relationship summary to new or 
prospective clients or customers in a manner that is consistent with 
how that retail investor requested information about the firm or 
financial professional would be consistent with the Commission's 
electronic delivery guidance.\695\ This approach applies only to the 
initial delivery of the relationship summary to new or prospective 
clients or customers, and not to any other delivery obligation of any 
other required disclosure. Moreover, to ensure that a relationship 
summary delivered electronically is noticeable for retail investors and 
not hidden among other disclosures, we are adopting a new instruction 
that a relationship summary delivered electronically must be presented 
prominently in the electronic medium and must be easily accessible for 
retail investors.\696\ For example, a firm can use a direct link or 
provide the relationship summary in the body of an email or 
message.\697\ We are also requiring firms to post the current version 
of the relationship summary prominently on their public website, if 
they have one, as proposed.\698\
---------------------------------------------------------------------------

    \695\ See Proposing Release, supra footnote 5, at nn.344-45 and 
accompanying text; see also 2000 Guidance, supra footnote 678, at 65 
FR 25845-46; 96 Guidance, supra footnote 678, at 61 FR 24647; and 95 
Guidance, supra footnote 678, at 60 FR 53461.
    \696\ General Instruction 10.C. to Form CRS.
    \697\ General Instruction 10.C. to Form CRS.
    \698\ Advisers Act rule 204-5(b)(3) and Exchange Act rule 17a-
14(c)(3); General Instruction 10.A. to Form CRS. The most recent 
versions of firms' relationship summaries will be accessible through 
Investor.gov. Firms will be required to include in their 
relationship summaries a phone number where investors can request 
up-to-date information and (if applicable) request a copy of the 
relationship summary. See Item 5.B. of Form CRS. Firms also could 
include their relationship summaries on other electronic media, such 
as mobile apps and other similar technologies.
---------------------------------------------------------------------------

    We understand that, while many investors prefer receiving 
disclosures about investment advice in electronic format, many also 
value the option to receive them in paper.\699\ We are adopting several 
additional requirements relating to relationship summaries in paper 
format. First, in a relationship summary that is delivered in paper 
format, firms may link to additional information by including URL 
addresses, QR codes, or other means of facilitating access to such 
information.\700\ Second, if a relationship summary is delivered in 
paper format as part of a package of documents, the firm must ensure 
that the relationship summary is the first among any documents that are 
delivered at that time, substantially as proposed.\701\ All firms will 
be required to make a copy of the relationship summary available upon 
request without charge.\702\ However, we are not requiring that firms 
make the relationship summary available in paper format. We understand 
that some firms' business models--for example, those of advisers 
providing automated investment advisory services and broker-dealers 
that provide services only online--are based on delivering 
substantially all disclosures and conducting substantially all 
correspondence with clients and customers electronically. We do not 
intend to change these practices and believe that retail investors that 
prefer paper communications will have the opportunity to establish 
relationships with firms that accommodate paper delivery.
---------------------------------------------------------------------------

    \699\ See RAND 2018, supra footnote 13 (when surveyed about how 
and when they would prefer to receive the relationship summary, 
``two-fifths reported that they would be most likely to view a paper 
document''); Schwab Letter I (Koski) supra footnote 21 (26% of 
survey participants preferred to receive disclosures about 
investment advice on paper; 46% preferred online or digital 
disclosures with the option for paper).
    \700\ General Instruction 3.B. to Form CRS.
    \701\ General Instruction 10.D. to Form CRS. Cf. Proposed 
General Instruction 8.(c) to Form CRS (``If the relationship summary 
is delivered on paper and not as a standalone document, you must 
ensure that the relationship summary is the first among any 
documents that are delivered at that time.'').
    \702\ General Instructions 1.C. to Form CRS.
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b. Initial Delivery
    The final instructions require an investment adviser registered 
with the SEC to deliver a relationship summary to each retail investor 
before or at the time the firm enters into an investment advisory 
contract, even if the agreement is oral, as proposed.\703\ The timing 
for standalone investment advisers to deliver the relationship summary 
to new or prospective retail clients generally tracks the initial 
delivery requirement for Form ADV Part 2A.\704\ As described further 
below, we are changing the instruction for broker-dealers to require 
delivery before or at earliest of one of three triggers.\705\ In

[[Page 33549]]

comparison, under the proposal, broker-dealers would have delivered the 
relationship summary before or at the time the retail investor first 
engages their services.\706\ Under the final rules, dual registrants, 
and affiliated broker-dealers and investment advisers that jointly 
offer their services to retail investors, must deliver at the earlier 
of the initial delivery triggers for an investment adviser or a broker-
dealer, including a recommendation of account type.\707\ This applies 
whether the dual registrant or affiliated firms prepare one single 
relationship summary describing both brokerage and investment advisory 
services, or two separate relationship summaries describing each type 
of service.
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    \703\ General Instruction 7.B.(i) to Form CRS. The final 
instructions for investment advisers are streamlined from the 
proposal, but remain substantively the same. Compare to Proposed 
Advisers Act rule 204-5(b)(1) and Proposed General Instruction 5.(b) 
to Form CRS (``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 Advisers Act rule 
204-5(b)(1) and Exchange Act rule 17a-14(c)(1). You must deliver the 
relationship summary even if your agreement with the retail investor 
is oral.''). We replaced the word ``agreement'' with ``contract'' to 
mirror the wording in the current Advisers Act rules and Form ADV 
instructions. See, e.g., Item 5.D of Part 2.A. of Form ADV. We also 
clarified that the delivery requirements apply to investment 
advisers registered with the SEC.
    \704\ See General Instruction 1 to Part 2A of Form ADV.
    \705\ General Instruction 7.B.(ii) to Form CRS (``If you are a 
broker-dealer, you must deliver a relationship summary to each 
retail investor, before or at the earliest of: (i) A recommendation 
of an account type, a securities transaction, or an investment 
strategy involving securities; (ii) placing an order for the retail 
investor; or (iii) the opening of a brokerage account for the retail 
investor.''). As described below, dual registrants will continue to 
deliver the relationship summary at the earlier of the requirements 
for investment advisers or broker-dealers. General Instruction 
7.B.(iii) to Form CRS (``A dual registrant must deliver the 
relationship summary at the earlier of the timing requirements in 
General Instruction 7.B.(i) or (ii).'').
    \706\ See Proposed Exchange Act rule 17a-14(c)(1); Proposed 
General Instruction 5.(b) to Form CRS.
    \707\ General Instruction 7.B.(iii) to Form CRS (``A dual 
registrant must deliver the relationship summary at the earlier of 
the timing requirements in General Instruction 7.B.(i) or (ii).'').
---------------------------------------------------------------------------

    Some commenters supported keeping the initial delivery requirements 
as proposed.\708\ Other commenters expressed concern that under the 
proposal, the relationship summary would be delivered only after the 
investor has already made a decision about which firm to engage and 
which type of account to open, and recommended variations on the 
proposed initial delivery requirements, including mandating even 
earlier delivery.\709\ The variations include, for example, delivery at 
the point of first contact or inquiry between the retail investor and 
firm, whenever possible; \710\ at the earlier of when a customer 
contacts the firm or enters into an advisory agreement or engagement of 
services; \711\ and upon the first interaction with a prospective 
retail investor.\712\ For dual registrants, one commenter recommended 
requiring delivery no later than the point at which a recommendation is 
made regarding which type of account to open.\713\ One commenter 
asserted that the Commission should not permit delivery ``at'' the time 
of service but rather should always require delivery ``before'' the 
provision of service.\714\ The IAC recommended providing ``a uniform, 
plain English disclosure document . . . to customers and potential 
customers of broker-dealers and investment advisers at the start of the 
engagement, and periodically thereafter.'' \715\
---------------------------------------------------------------------------

    \708\ See, e.g., Trailhead Consulting Letter; Schnase Letter 
(agreeing that the relationship summary should be required to be 
delivered along the lines proposed in the Proposing Release); SIFMA 
Letter (``For the initial delivery most brokerage firms likely will 
include [the relationship summary] with account applications or 
other account opening materials, while investment advisers will 
include it with their Form ADV.'').
    \709\ See, e.g., CFA Letter I; CFA Institute Letter I; AARP 
Letter; NASAA Letter; Consumers Union Letter; Consumer Reports 
Letter. In the RAND 2018 survey, supra footnote 13, 70% of 
respondents reported that they would prefer to receive the 
relationship summary at the outset of the relationship, i.e., 
``before or at the time you first engage the investment 
professional'' and slightly more than 30% of respondents would 
prefer to receive the relationship summary ``before the investment 
professional first recommends a transaction or investment 
strategy''; see also Schwab Letter I (Koski), supra footnote 21 
(when asked ``[w]hich of the following best describes your 
preference for when you would like to receive information about how 
a Brokerage Firm or a Registered Investment Adviser (RIA) does 
business with you?'', 41% preferred ``[a]t or before I open my 
account, plus any updates on an annual basis,'' 22% preferred 
``[a]vailable on an ongoing basis, such as on a firm's website,'' 
19% preferred at ``[a]t or before I open my account only,'' and 17% 
preferred ``[e]very single time I receive investment advice.'').
    \710\ See CFA Letter I.
    \711\ See CFA Institute Letter I.
    \712\ See AARP Letter.
    \713\ See CFA Letter I.
    \714\ See NASAA Letter.
    \715\ See IAC Broker-Dealer Fiduciary Duty Recommendations, 
supra footnote 10.
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    A few commenters supported requiring a period of time between 
delivery of the relationship summary and the beginning of the 
relationship.\716\ One commenter suggested allowing time for retail 
investors to review the relationship summary, subsequent to delivery 
when the firm first interacts with a retail investor.\717\ A number of 
investors at Commission-held roundtables also supported a waiting 
period.\718\ Other commenters, however, opposed a mandated delay 
between delivery of the relationship summary and engaging in 
services.\719\
---------------------------------------------------------------------------

    \716\ See, e.g., AARP Letter; CFA Institute Letter I; NASAA 
Letter.
    \717\ See AARP Letter.
    \718\ See, e.g., Houston Roundtable, at 51 (one investor 
suggesting a ``cool-off period''); Washington, DC Roundtable, at 58 
(at least two investors supporting a ``lapse'' of time between 
receipt of a relationship summary and having to sign it).
    \719\ Comment Letter of John Neil Conkle (Aug. 7, 2018) (arguing 
that a waiting period is not necessary for the relationship summary 
to fulfill its purpose); Edward Jones Letter (arguing that a waiting 
period could harm investors by preventing them from meeting IRA 
contribution or rollover deadlines, for example, or at a minimum 
cause frustration); SIFMA Letter (arguing that the relationship 
summary is designed to be contemporaneously read and understood).
---------------------------------------------------------------------------

    Various commenters explained logistical and recordkeeping issues if 
firms were required to deliver the relationship summary at first 
contact or prior to engaging a firm's services.\720\ For example, one 
commenter stated that it would not be feasible to obtain an investor's 
affirmative consent to electronic delivery before the investor decides 
to engage the firm.\721\ Tracking whether or not prospective customers 
had consented to electronic delivery of the relationship summary would 
be difficult because prospective customers who do not open accounts 
would not have account numbers or other unique identifiers for the 
firm's recordkeeping purposes.\722\ Other commenters argued that 
keeping records of when a relationship summary was given to a 
prospective retail investor would be unnecessarily burdensome for firms 
and would likely provide de minimis benefits.\723\ Still other 
commenters discussed the difficulty of defining when a customer first 
engages the firm's services, the terminology used in the proposal.\724\
---------------------------------------------------------------------------

    \720\ See, e.g., Edward Jones Letter (asserting that requiring 
firms to record the delivery of the relationship summary to 
prospective clients that subsequently become clients would impose a 
significant burden without providing meaningful benefits to 
investors); SIFMA Letter (``[I]t would be very burdensome and not 
practical in many instances to keep track of Forms CRS that are 
provided to retail investors who never seek to establish a 
relationship with a firm.''); Primerica Letter; LPL Financial 
Letter.
    \721\ See LPL Financial Letter.
    \722\ See LPL Financial Letter.
    \723\ See infra footnote 803; see also infra footnotes 798-816 
and accompanying text regarding recordkeeping requirements.
    \724\ See, e.g., Fidelity Letter; SIFMA Letter; Primerica 
Letter; TIAA Letter.
---------------------------------------------------------------------------

    We encourage investment advisers and broker-dealers to deliver the 
relationship summary far enough in advance of a prospective retail 
investor's final decision to engage the firm to allow for meaningful 
discussion between the financial professional and retail investor, 
including by using the conversation starters, so that the retail 
investor has time to understand the relationship summary and to weigh 
available options. We believe that prospective clients or customers 
would benefit from receiving the relationship summary as early as 
possible when deciding whether to engage the services of a firm or 
financial professional. In response to comments on initial delivery, 
including those relating specifically to broker-dealers, we are 
modifying the broker-dealer initial delivery requirements, as discussed 
below. However, we are declining to mandate a delivery requirement 
based on first contact or inquiry, or to impose a waiting period. 
First, ``first contact or inquiry'' may include circumstances that are 
not limited to the seeking of investment services, such as business

[[Page 33550]]

interactions for other purposes or social interactions, and therefore 
could create compliance uncertainty. Second, we believe the 
availability of each firm's relationship summary through Investor.gov 
and on its own website, if the firm has one, helps to address the 
concern that investors will not have the opportunity to review and 
compare relationship summaries before entering into an investment 
advisory contract or receiving services from a broker-dealer.\725\ 
Third, some investors may not want to wait to begin services,\726\ and 
those who do can always take as much time as needed to review the 
relationship summary and wait to sign an advisory agreement or begin 
receiving brokerage services at a later time. Fourth, firms will be 
permitted to deliver the relationship summary well before they enter 
into an advisory agreement or provide brokerage services, and as noted, 
we encourage firms to deliver the relationship summary early in the 
process. Finally, dual registrants, and affiliated broker-dealers and 
investment advisers that jointly offer their services to retail 
investors, must deliver their relationship summaries at the earlier of 
the delivery triggers for broker-dealers or investment advisers. To the 
extent the initial delivery requirements for a broker-dealer are 
earlier than the delivery requirements would be for an investment 
adviser, the earlier requirements will apply to an investment adviser 
that is a dual registrant or that offers services jointly with a 
broker-dealer affiliate. We believe this will provide a significant 
benefit to retail investors, given the substantial percentage of 
regulatory assets under management (``RAUM'') managed by dual 
registrants and investment advisers with broker-dealer affiliates, 
relative to the total RAUM managed by investment advisers overall.\727\
---------------------------------------------------------------------------

    \725\ See CFA Institute Letter I (``We strongly support the 
requirement that firms with public websites must post their CRSs on 
their sites in an easily accessible location and format. . . . 
Investors can review the disclosures provided there before deciding 
on a service provider and showing up for a meeting. Then when 
presented with the CRS `before or at the time' of entering into an 
agreement or engaging a firm's services, an investor will have 
already had an opportunity to review the disclosures and come armed 
with questions.'').
    \726\ See, e.g., Edward Jones Letter (stating that some 
investors have a very specific timeframe for opening a new account, 
such as meeting an IRA contribution or rollover deadline); SIFMA 
Letter (stating that requiring a waiting period would frustrate a 
retail customer's efforts to begin his or her relationship with a 
financial services provider).
    \727\ As of December 31, 2018, 1,878 SEC-registered investment 
advisers report in their Form ADV an affiliate that is a broker-
dealer also registered with the SEC. These 1,878 SEC-registered 
investment advisers manage approximately $58.48 trillion, or 
approximately 70% of total RAUM managed by SEC-registered investment 
advisers. Furthermore, 359 SEC-registered investment advisers that 
are also dually-registered as broker-dealers manage approximately 
$5.18 trillion, or 6.12% of total RAUM. Thus, SEC-registered 
investment advisers that report registered broker-dealer affiliates 
and dual registrants together manage over 75% of RAUM. See also 
infra footnotes 855, 888-889, and accompanying text.
---------------------------------------------------------------------------

    To facilitate earlier delivery, as discussed above, the final 
instructions allow firms to deliver the relationship summary to a new 
or prospective client or customer in a manner that is consistent with 
how the retail investor requested information about the firm or 
financial professional, clarifying that this approach would be 
consistent with the SEC's electronic delivery guidance.\728\ We believe 
this approach alleviates concerns expressed by commenters that 
obtaining the consent of prospective clients or customers to receive 
electronic delivery and maintaining records of that consent would be 
challenging.\729\ While we recognize recordkeeping burdens relating to 
the delivery of the relationship summary to prospective clients--for 
example, we are not imposing a delivery requirement upon first contact 
or inquiry by a retail investor, as discussed above--we disagree that 
they are insurmountable and would outweigh the benefits to retail 
investors. As discussed further in Section II.E. below, investment 
advisers and broker-dealers have experience with similar recordkeeping 
requirements.\730\ Moreover, we believe there is considerable benefit 
to retail investors in receiving the relationship summary before 
deciding to engage a firm, to allow time for questions and discussion 
with the financial professional, to understand the relationship 
summary, and to weigh available options.
---------------------------------------------------------------------------

    \728\ General Instruction 10.B. to Form CRS.
    \729\ See supra footnotes 720-722 and accompanying text.
    \730\ See infra footnotes 809-810 and accompanying text.
---------------------------------------------------------------------------

    Commenters suggested modifications to the proposed initial delivery 
requirements specifically for broker-dealers. Several commenters 
requested that we require broker-dealers to deliver the relationship 
summary at the point of first contact, inquiry, or interaction with a 
retail investor.\731\ A number of commenters also raised questions 
about the meaning of ``engaging the services'' of a broker-dealer, 
noting that it was unclear when that may ultimately occur and that it 
is a new and undefined concept in the context of a customer 
relationship with a broker-dealer.\732\ Other commenters suggested that 
we exclude or exempt certain types of broker-dealers that provide 
limited services to retail investors from the requirement to deliver 
the relationship summary or from the requirements of Form CRS more 
generally.\733\
---------------------------------------------------------------------------

    \731\ See CFA Institute Letter I; AARP Letter; and NASAA Letter.
    \732\ See Primerica Letter; SIFMA Letter; and Fidelity Letter.
    \733\ See, e.g., Fidelity Letter (recommending ``that the SEC 
exclude limited-purpose broker-dealers acting solely as mutual fund 
general distributors from the obligation to deliver Form CRS to 
direct mutual fund investors that invest on an unsolicited basis, 
and shareholders investing through an intermediary (such as a full 
service broker-dealer or bank) that has an independent obligation to 
deliver such information to its client'' and suggesting ``that the 
SEC explicitly exempt from the Form CRS requirement certain 
categories of broker-dealers, including clearing firms, principal 
underwriters, and distributors of mutual funds, as these firms do 
not have a direct relationship with the end investor based on their 
business models''); ICI Letter; Wells Fargo Letter; Invesco Letter; 
ACLI Letter; Comment Letter of Great-West Financial (Aug. 6, 2018); 
T. Rowe Letter and Oppenheimer Letter.
---------------------------------------------------------------------------

    In response to these concerns, we are modifying the initial 
delivery requirements for broker-dealers. Instead of ``at the time the 
retail investor first engages a broker-dealer's services,'' broker-
dealers will be required to deliver the relationship summary to each 
retail investor before or at the earliest of: (i) A recommendation of 
an account type, a securities transaction, or an investment strategy 
involving securities; (ii) placing an order for the retail investor; or 
(iii) the opening of a brokerage account for the retail investor.\734\ 
We believe that these more concrete initial delivery triggers for 
broker-dealers avoid the uncertainty of when a retail investor first 
engages a broker-dealer's services and include scenarios that encompass 
earlier delivery, in response to commenters' concerns.
---------------------------------------------------------------------------

    \734\ See Exchange Act rule 17a-14(c)(1); General Instruction 
6.B.(ii) to Form CRS.
---------------------------------------------------------------------------

    As noted, the proposal would have required broker-dealers to 
deliver the relationship summary before or at the time the retail 
investor first engages the firm's services. This proposed requirement 
was 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''. The proposed rule would not have required 
delivery to a retail investor to whom a broker-dealer makes a 
recommendation, if that retail investor did not open or have an account 
with

[[Page 33551]]

the broker-dealer, or that recommendation did not lead to a transaction 
with that broker-dealer.\735\ If the recommendation led to a 
transaction with the broker-dealer who made the recommendation, the 
retail investor would have been considered to be ``engaging the 
services'' of that broker-dealer at the time the customer places the 
order or an account is opened, whichever occurred first. Instead, in 
response to comments advocating for earlier delivery, the final 
requirement expands on the proposed initial delivery requirement and 
potentially pushes it earlier, to require delivery (even where a 
brokerage account has not been established) before or at the time a 
broker-dealer recommends an account type, a securities transaction, or 
an investment strategy involving securities without regard to whether 
the retail investor acts on the recommendation. We believe that 
revising the delivery requirement in this way will give retail 
investors the opportunity to consider the information included in the 
relationship summary earlier in the process of determining whether to 
establish a brokerage relationship with the broker-dealer, as well as 
in evaluating the recommendation.
---------------------------------------------------------------------------

    \735\ Proposing Release, supra footnote 5.
---------------------------------------------------------------------------

    Compared to the proposal, the final requirement also pushes earlier 
the time at which broker-dealers must deliver the relationship summary 
in instances in which the retail investor does not open an account but 
still engages in a securities transaction such as the ``check and 
application'' example described above. Under these circumstances, 
broker-dealers must deliver the relationship summary before or at the 
time an order is placed for the retail investor, instead of before or 
at the time the transaction is effected, as proposed. This delivery 
obligation would be triggered to the extent this type of transaction 
were unsolicited, because, as described above, if a recommendation 
preceded this type of transaction, delivery would have been triggered 
before or at the time of the recommendation.
    To the extent the broker-dealer had not already made a 
recommendation of an account type, a securities transaction or an 
investment strategy involving securities, or placed an order for the 
retail investor, delivery would be triggered before or at the time the 
retail investor opens a brokerage account with the broker-dealer. As 
revised, we believe that the initial delivery triggers for broker-
dealers avoid the uncertainty of the proposed initial delivery standard 
and include scenarios that encompass earlier delivery, in response to 
commenters' concerns.
    In response to the comments requesting exemptions or exclusions 
from the relationship summary obligations generally and the delivery 
obligations for certain broker-dealers that engage in limited 
activities, we are clarifying that we do not intend for the Form CRS 
requirements to apply to certain types of relationships between a 
broker-dealer and a retail investor. Pursuant to Exchange Act Rule 17a-
14, the scope of the Form CRS requirement applies ``to every broker or 
dealer registered with the Commission pursuant to section 15 of the Act 
that offers services to a retail investor'' (emphasis added). Solely 
for purposes of Form CRS, we are describing here the types of 
relationships between a broker-dealer and a retail customer that we 
would not consider to be ``offer[s] [of] services to a retail 
investor''.
    Specifically, clearing and carrying broker-dealers that are solely 
providing services to third party or affiliated introducing broker-
dealers would not be considered to be offering services to a retail 
investor for purposes of Exchange Act Rule 17a-14, and would not be 
subject to the Form CRS requirements when acting in such capacity. As 
described above, the relationship summary is designed to make it easier 
for retail investors to get the facts they need when deciding among 
investment firms or financial professionals and the accounts and 
services available to them. When a retail investor is establishing or 
has a relationship with an introducing broker-dealer, we believe that 
the retail investor would benefit most from focusing on that broker-
dealer's services, fees, standard of conduct, conflicts of interest and 
disciplinary history. In these circumstances, we believe that receiving 
an additional relationship summary from a clearing or carrying broker-
dealer could create confusion and detract from the goals of this 
disclosure.
    Additionally, we would not consider a broker-dealer that is serving 
solely as a principal underwriter to a mutual fund or variable annuity 
or variable life insurance contract issuer to be offering services to a 
retail investor for purposes of Exchange Act Rule 17a-14, when acting 
in such capacity. As with clearing and carrying broker-dealers, broker-
dealers serving solely as principal underwriters do not typically 
establish the kind of relationship with retail investors that Form CRS 
has been designed to address. To the extent such broker-dealers 
interact with a retail customer in a different capacity (beyond serving 
as a principal underwriter to the mutual fund or variable contract that 
the retail investor owns), we believe the nature of their relationship 
could become one where delivery of the Relationship Summary would be 
useful. Accordingly, Form CRS's obligations would apply in those 
instances.\736\
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    \736\ For example, we would expect the requirements of Form CRS 
to apply in the event the broker-dealer makes a recommendation of an 
account type, securities transaction or investment strategy 
involving securities, the retail investor places an order for the 
purchase of different securities, or the retail investor opens a new 
brokerage account with the broker-dealer.
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    We are adopting as proposed the approach to delivery for dual 
registrants, whereby they must deliver the relationship summary to a 
new or prospective retail investor at the earlier of the delivery 
triggers applicable to investment advisers and broker-dealers.\737\ One 
commenter argued that a dual registrant should be required to deliver 
the relationship summary at the earlier of providing an investment 
recommendation or the time a retail investor opens an account with the 
firm.\738\ We believe that the broker-dealer initial delivery 
requirements, as adopted, accommodate this comment. Another commenter 
asserted that dual registrants should be required to deliver the 
relationship summary no later than when a recommendation is made as to 
the type of account to open.\739\ We believe that the final initial 
delivery requirements accommodate this comment also. Broker-dealers 
will be required to deliver the relationship summary before or at the 
earliest of (i) a recommendation of an account type, a securities 
transaction, or an investment strategy involving securities, (ii) 
placing an order for the retail investor, or (iii) the opening of a 
brokerage account for the retail investor.\740\ Investment advisers 
will be required to deliver the relationship summary before or at the 
time of entering into an investment advisory contract with the retail 
investor.\741\ Dual registrants will be required to deliver the 
relationship summary when recommending an account type to the retail 
investor if it is the earliest occurrence among the initial delivery 
triggers for broker-dealers and investment advisers, which we believe 
will typically precede the opening of a brokerage account or

[[Page 33552]]

entering into an investment advisory contract.\742\
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    \737\ Advisers Act rule 204-5(b)(1) and Exchange Act rule 17a-
14(c)(1); see also General Instruction 7.B.(iii) to Form CRS.
    \738\ See State Farm Letter.
    \739\ See CFA Letter I.
    \740\ See Exchange Act rule 17a-14(c)(1); General Instruction 
7.B.(ii) to Form CRS.
    \741\ See Advisers Act rule 204-5(b)(1); General Instruction 
7.B.(i) to Form CRS.
    \742\ See General Instruction 7.B.(iii) to Form CRS.
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c. Additional Delivery Requirements to Existing Clients and Customers
    We are adopting requirements for firms to re-deliver the 
relationship summary to existing clients and customers under certain 
circumstances, with some modifications from the proposal. We continue 
to believe that these investors will benefit from being reminded of the 
information contained in the relationship summary, including about the 
different services and fees that the firm offers, when they are again 
making decisions about whether to invest through an advisory account or 
a brokerage account. Specifically, after an initial delivery of the 
relationship summary to existing clients and customers who are retail 
investors, firms will be required to deliver the most recent version of 
the relationship summary to a retail investor if they (i) open a new 
account that is different from the retail investor's existing 
account(s); (ii) recommend that the retail investor roll over assets 
from a retirement account into a new or existing account or investment; 
or (iii) recommend or provide a new brokerage or investment advisory 
service or investment that does not necessarily involve the opening of 
a new account and would not be held in an existing account, for 
example, the first time purchase of a direct-sold mutual fund or 
insurance product that is a security through a ``check and 
application'' process, i.e., not held directly within an account.
    In comparison, as proposed, the instructions would have required a 
firm to deliver a relationship summary to existing clients or customers 
when: (i) A new account is opened that is different from the retail 
investor's existing account, or (ii) changes are made to the existing 
account that would materially change the nature and scope of the 
relationship. The proposed instructions provided that whether a change 
was material for these purposes would depend on the specific facts and 
circumstances and gave as examples transfers from an investment 
advisory account to a brokerage account, transfers from a brokerage 
account to an investment advisory account, and moves of assets from one 
type of account to another in a transaction not in the normal, 
customary or already agreed course of dealing.
    In the RAND 2018 survey, 50% of respondents reported that they 
would like to receive an updated relationship summary ``whenever there 
is a material change in the Relationship Summary, such as a change in 
fees or commission structure,'' about 30% would prefer to receive the 
relationship summary periodically and almost 40% preferred to receive 
the summary on request.\743\ One commenter supported the additional 
delivery requirements to existing clients and customers as proposed, 
agreeing that investors are again making decisions about relationships 
and account types under these circumstances and would benefit from the 
information the relationship summary provides.\744\ Another commenter 
recognized the value of delivering the relationship summary to existing 
clients and customers but recommended specific limitations to the 
requirements.\745\ One commenter supported once a year or periodic 
updates and continued availability of a current version on a firm's 
website,\746\ while another commenter opposed any requirement to 
provide periodic updates.\747\ Several commenters argued that some or 
all of the additional delivery requirements are not necessary, given 
the prior initial delivery and online availability of relationship 
summaries.\748\ A few commenters argued that the additional delivery 
requirements could confuse investors because of either an apparent 
duplication or difference from delivery requirements of existing 
disclosures.\749\ One commenter also stated that the proposed 
additional delivery requirements could overwhelm investors in a 
counterproductive way.\750\ Furthermore, commenters requested 
additional guidance or examples for what would ``materially change'' 
the relationship.\751\
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    \743\ RAND 2018, supra footnote 13.
    \744\ See CFA Letter I (``We support this proposal and agree 
with the Commission that, 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.' '').
    \745\ See SIFMA Letter (arguing that a ``material change'' 
should be defined as changes from an advisory account to a brokerage 
account or vice versa, and not include asset movements from one type 
of account to another or ``other material changes'').
    \746\ See Schwab Letter I; Schwab Letter III.
    \747\ See CFN Letter.
    \748\ See, e.g., LPL Financial Letter (``It is not clear what 
additional benefits obtain from delivering an identical copy of a 
document an investor has already received.''); SIFMA Letter (``[W]e 
do not believe these additional trigger points [other than changing 
from one type of account to another] are necessary because customers 
will receive Form CRS at periodic intervals throughout the 
relationship, and customers will have continual online access to a 
firm's Form CRS via a website posting, making the need to ``push 
out'' the Form CRS at additional points unnecessary.''); Institute 
for Portfolio Alternatives Letter (``We suggest that delivery of a 
new or updated Form CRS with every transaction would be excessive, 
impractical and without commensurate investor benefit''); UBS Letter 
(``If a client already has both a brokerage account and an advisory 
account and is transferring assets from one to another . . . the 
client already would have the critical disclosures applicable to 
both account types . . . .'').
    \749\ See, e.g., Comment Letter of AXA (Aug. 7, 2019) 
(``[E]xisting customers have already decided which firm to work 
with, so requiring firms to send the Relationship Summary to those 
customers is likely to cause customer confusion.''); Pickard Djinis 
and Pisarri Letter (``The disharmony between the existing ADV 
brochure delivery requirements and the proposed requirements under 
Rule 204-5 are likely to confuse clients. . . .''); UBS Letter 
(``[R]eceiving the Form CRS again in such circumstances would likely 
lead to confusion rather than an improved understanding.'').
    \750\ See SIFMA Letter (``Providing Form CRS to investors beyond 
[changes from one type of account to another] could overwhelm them 
with duplicative or redundant information,'' making it ``less likely 
they will digest the information.'').
    \751\ See, e.g., Prudential Letter (``[M]ore guidance is needed 
on this point; additional examples of triggering events would 
provide clarity.''); TIAA Letter (``SEC should identify additional 
instances beyond account changes that would trigger re-delivery.''); 
Cambridge Letter (requesting further guidance on a material change 
to the nature and scope of the relationship and encouraging SEC to 
provide a broad set of examples); SIFMA Letter (``[I]t is not clear 
what `other material' changes or assets movements `not in the 
normal, customary, or already agreed course of dealing' would be''); 
Institute for Portfolio Alternatives Letter (requesting guidance on 
what facts and circumstances would trigger a ``material'' change and 
require delivery of a new, or updated, Form CRS); Comment Letter of 
Sorrento Pacific Financial, LLC (Aug. 7, 2018).
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    In addition, some commenters expressed concerns about 
administrative and operational burdens relating to the proposed 
additional delivery requirements.\752\ For example, one commenter 
asserted that firms would be required to build entirely new operational 
and supervisory processes to identify asset movements divorced from any 
account opening process that could trigger an additional delivery 
requirement.\753\ This commenter also argued that the review that would 
be required prior to effecting potentially triggering asset movements 
could cause delays that are detrimental to the retail

[[Page 33553]]

investor.\754\ Similarly, another commenter explained that most of the 
proposed additional delivery triggers would be relatively easy to 
identify and address through existing processes, such as new account 
openings and when a brokerage account is converted to an investment 
advisory account and vice versa.\755\ Other potential delivery 
triggers, however, such as investments of inheritances or proceeds of a 
property sale, or a significant migration from savings to investment, 
would present operational challenges and compliance costs.\756\ These 
commenters recommended limiting additional delivery requirements to 
circumstances in which a brokerage account is converted to an 
investment advisory account and vice versa.\757\
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    \752\ See SIFMA Letter; LPL Financial Letter; Institute for 
Portfolio Alternatives Letter; Pickard Djinis and Pisarri Letter 
(additional delivery requirements ``would impose unjustifiable 
administrative burdens on advisers, the majority of whom are small 
businesses.'').
    \753\ See SIFMA Letter (explaining that, because additional 
delivery triggers could be divorced from any account opening 
process, entirely new operational and supervisory processes would 
need to be designed (i) to identify potentially triggering asset 
movements; (ii) to review for whether a proposed asset movement is 
not in the normal, customary, or already agreed course of dealing; 
and (iii) depending on whether delivery were required, create and 
preserve either a record of the delivery or of the conclusion that 
no such delivery was required).
    \754\ See SIFMA Letter.
    \755\ See LPL Financial Letter.
    \756\ See LPL Financial Letter (explaining that its existing 
systems are not designed to monitor and record dates of non-ordinary 
course events or to distinguish those events from routine account 
changes).
    \757\ See SIFMA Letter; LPL Financial Letter.
---------------------------------------------------------------------------

    We disagree that delivery of the relationship summary to existing 
clients and customers is unnecessary if the investor has already 
received one. As noted above, when investors are again making decisions 
about whether to choose an investment advisory or brokerage account, we 
believe they will benefit from being reminded that different options 
are available and where they can get more information to inform their 
choice. We are not requiring that the relationship summary be delivered 
at periodic intervals or at every transaction; thus we disagree with 
comments that the additional delivery obligations will not provide 
commensurate benefit to investors, or will confuse or overwhelm 
investors. We are therefore adopting additional delivery requirements 
that apply to a firm's existing clients and customers, with some 
modifications from those proposed.
    First, as proposed (and supported by two commenters as noted 
above), we are adopting the requirement that a firm deliver the 
relationship summary when opening any new account that is different 
from the retail investor's existing account(s).\758\ Second, in 
response to comments we are replacing the proposed standard of 
``materially change the nature and scope of the relationship'' with 
two, more specific and easily identifiable, triggers that we believe 
would not implicate the same operational or supervisory burdens 
described by commenters to meet the proposed requirement.\759\ Instead, 
firms will be required to deliver a relationship summary to existing 
clients and customers when recommending that the retail investor roll 
over assets from a retirement account, or recommending or providing a 
new brokerage or investment advisory service or investment that does 
not necessarily involve the opening of a new account and would not be 
held in an existing account, for example, the first-time purchase of a 
direct-sold mutual fund or insurance product (e.g., variable annuities) 
that is a security through a ``check and application'' process, i.e., 
not held directly within an account.\760\ While these requirements will 
still impose operational and supervisory burdens, we believe they are 
more easily identified and monitored, such that firms will not need to 
create new systems or processes to the extent that commenters said 
would be necessary to comply with the proposed ``material change'' 
standard. These more specific triggers are intended to provide investor 
protection under these circumstances in a more cost-effective manner, 
while still addressing the objectives that the ``material changes'' 
language sought to address, that is, to ensure that a firm does not 
switch existing customers or clients into accounts or services without 
explaining or giving them the opportunity to consider other available 
options.\761\ Also, as proposed, we are adopting the instruction that 
firms must deliver the relationship summary to a retail investor within 
30 days upon the retail investor's request.\762\ While some commenters 
requested changes to the proposed delivery requirements, they 
nonetheless supported requiring delivery upon request.\763\
---------------------------------------------------------------------------

    \758\ General Instruction 9.A. to Form CRS.
    \759\ See supra footnotes 752-757 and accompanying text.
    \760\ General Instruction 9.A. to Form CRS.
    \761\ Recommendations of account types to existing customers and 
clients also are addressed in the Regulation Best Interest Release 
and Fiduciary Release, supra footnote 47.
    \762\ General Instruction 9.B. to Form CRS.
    \763\ See Fidelity Letter; SIFMA Letter.
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    Finally, delivery of the relationship summary will not necessarily 
satisfy any other disclosure obligations the firm has under the federal 
securities laws or other laws or regulations, as proposed. The 
relationship summary requirement will be in addition to, and not in 
lieu of, other disclosure and reporting requirements or other 
obligations for broker-dealers and investment advisers.\764\ One 
commenter suggested that we require that the relationship summary 
include a prominent statement that it does not replace, but rather 
should be read in conjunction with, Form ADV or Form BD.\765\ This 
commenter also suggested that the relationship summary should include a 
hyperlink to the appropriate Form ADV or Form BD, as applicable.\766\ 
We believe that the required links in the Additional Information 
section, discussed in Section II.B.5. above, addresses these comments.
---------------------------------------------------------------------------

    \764\ For example, the relationship summary would not 
necessarily satisfy the disclosure requirements under Regulation 
Best Interest. See Regulation Best Interest Release, supra footnote 
47.
    \765\ See Financial Engines Letter.
    \766\ See Financial Engines Letter.
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    Some commenters argued that investment advisers should not be 
required to deliver a relationship summary to retail clients because 
they already deliver a Form ADV Part 2A brochure.\767\ We disagree. By 
requiring both investment advisers and broker-dealers to deliver a 
relationship summary that discusses at a high level both types of 
services and their differences in a comparable format, the relationship 
summary would help all retail investors compare not only among 
investment advisory services, but also between investment advisory and 
brokerage services. We do not believe that existing disclosures provide 
this level of transparency and comparability across investment 
advisers, broker-dealers, and dual registrants. Form CRS is a summary 
disclosure designed to provide a high-level overview of services, fees, 
costs, conflicts of interest, standard of conduct, and disciplinary 
history, to retail investors in order to help them decide whether to 
engage a particular firm or financial professional, including deciding 
whether to seek investment advisory or brokerage services. Form ADV 
Part 2A, in contrast, requires more detailed disclosures specific to 
advisory services. 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 will not be required to prepare or file 
a relationship summary, as proposed.\768\
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    \767\ Comment Letter of Registered Advisor Services (Apr. 20, 
2018); Comment Letter of Franklin Templeton Investments (Aug. 6, 
2018); IAA Letter I; Triad Letter; Pickard Djinis and Pisarri 
Letter; Prudential Letter; see also State Farm Letter (arguing that 
investment advisers should be required to include in their 
relationship summaries only those disclosures that are not otherwise 
available, provided that a representative heading or introductory 
statement and a hyperlink to such disclosures are provided in the 
Relationship Summary).
    \768\ See amended Advisers Act rule 203-1, note to paragraph 
(a)(1); Exchange Act rule 17a-14(a), (b). See introduction of 
General Instructions to Form CRS.

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[[Page 33554]]

4. Updating Requirements
    We are adopting substantially as proposed a requirement for firms 
to update the relationship summary within 30 days whenever the 
relationship summary becomes materially inaccurate.\769\ Firms also 
must post the latest version on their website (if they have one), and 
electronically file the relationship summary with the Commission.\770\ 
Although some commenters expressed different views on the requirement 
to communicate updated information to retail investors, as discussed 
below, most commenters did not object to the proposed requirements to 
update the relationship summary within 30 days of a material change and 
the associated posting and filing obligations.\771\ On the other hand, 
one commenter advocated that firms be allowed 60 days to update the 
relationship summary to address operational issues, but did not 
describe the specific operational challenges.\772\ Based on our 
experience with other similar filings, we believe the proposed approach 
is consistent with the current requirements for investment advisers to 
update the Form ADV Part 2A brochure,\773\ and with broker-dealers' 
current obligations, including to update Form BD if its information is 
or becomes inaccurate for any reason.\774\ We continue to believe that 
allowing 30 days for firms to make updates provides sufficient time for 
firms to make the necessary revisions. Therefore, we are adopting these 
requirements as proposed.
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    \769\ Advisers Act rule 204-1(a)(2) and Exchange Act rule 17a-
14(b)(3); General Instruction 8.A. to Form CRS. For investment 
advisers, we are also adopting amendments to the General 
Instructions to Form ADV to mirror this requirement and to clarify 
the filing type. See amended General Instruction 4 to Form ADV 
(revised to add the following language: ``If you are registered with 
the SEC, you must amend Part 3 of your Form ADV within 30 days 
whenever any information in your relationship summary becomes 
materially inaccurate by filing with the SEC an additional other-
than-annual amendment or by including the relationship summary as 
part of an annual updating amendment.''); see also supra footnotes 
673-677 and accompanying text.
    \770\ Advisers Act rules 203-1(a)(1), 204-5(b)(3) and Exchange 
rules 17a-14(b)(2), 17a-14(c)(3); General Instructions 8.A., 8.C., 
and 10.A. to Form CRS.
    \771\ See, e.g., Trailhead Consulting Letter (``If the form is 
kept to a more generalized and educational nature, material changes 
shouldn't occur too often.''); NASAA Letter; LPL Financial Letter; 
Prudential Letter; Primerica Letter.
    \772\ See Morgan Stanley Letter (30 days ``may not be sufficient 
to address the related operational issues'').
    \773\ See, e.g., Advisers Act rule 204-5(b)(4); General 
Instruction 8 to Form CRS. Generally, an investment adviser 
registered with the SEC is required to amend its Form ADV promptly 
if information provided in its brochure becomes materially 
inaccurate. See Advisers Act rule 204-1(a)(2); General Instruction 4 
to Form ADV.
    \774\ See, e.g., Exchange Act rule 15b3-1.
---------------------------------------------------------------------------

    The proposed instructions also would have required firms, without 
charge to the retail investor, to communicate updated information by 
delivering the amended relationship summary or by communicating the 
information another way.\775\ As noted above, commenters expressed 
different views regarding this approach. Some commenters advocated for 
posting the relationship summary on a firm's website in order to meet 
the communication requirement.\776\ On the other hand, one commenter 
advocated for requiring firms to deliver updated relationship summaries 
whenever a change is made, rather than permitting firms to communicate 
the information in another way.\777\ We are adopting slightly revised 
final instructions to eliminate the proposed wording ``another way'' in 
order to clarify that a firm may communicate the information through 
another disclosure, and that disclosure must be delivered to the retail 
investor.\778\ In other words, merely providing notice of or access to 
another disclosure or the relationship summary would not satisfy this 
final instruction. 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 that also contained the updated 
information, this would support a reasonable belief that the 
information had been communicated to the retail investor, and the 
investment adviser will not be required to deliver an updated 
relationship summary to that retail investor. This requirement provides 
firms the flexibility to disclose changes to the relationship summary 
without requiring them to incur additional delivery costs.
---------------------------------------------------------------------------

    \775\ See Proposed General Instruction 6.(b) to Form CRS.
    \776\ See, e.g., Fidelity Letter (``We also support the SEC's 
position that with respect to material changes of information 
provided in a Form CRS, firms must either provide an updated Form 
CRS to retail investors or communicate the changes in another way 
such as posting on the firm's website.''); Morgan Stanley Letter; 
Primerica Letter.
    \777\ See NASAA Letter.
    \778\ General Instruction 8.B. to Form CRS (``You can make the 
communication by delivering the amended relationship summary or by 
communicating the information through another disclosure that is 
delivered to the retail investor.'').
---------------------------------------------------------------------------

    In another modification from the proposal, the rules as adopted 
will allow firms to communicate the information in an amended 
relationship summary to retail investors who are existing clients or 
customers within 60 days after the updates are required to be made, 
instead of 30 days as proposed.\779\ Two commenters advocated that 
allowing 60 days for the communication would increase the likelihood 
that firms could deliver an updated relationship summary along with 
other disclosures that firms commonly deliver on a quarterly basis, 
rather than in a separate delivery.\780\ Delivery with other 
disclosures is consistent with the instructions regarding the way in 
which relationship summary updates may be communicated. We are 
clarifying this, as noted above, and adopting the requirement that 
firms must communicate updates to the relationship summary within 60 
days after the updates are required to be made.
---------------------------------------------------------------------------

    \779\ Advisers Act rule 204-5(b)(4) and Exchange Act rule 17a-
14(c)(4); Proposed General Instruction 6.(b) to Form CRS.
    \780\ See LPL Financial Letter; Morgan Stanley Letter. For 
example, NASD Rule 2340 requires broker-dealers to deliver account 
statements generally on a quarterly basis.
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    In a further change from the proposal, firms must highlight the 
changes in an amended relationship summary by, for example, marking the 
revised text or including a summary of material changes and attaching 
the changes as an exhibit to the unmarked amended relationship 
summary.\781\ The unmarked amended relationship summary and exhibit 
must be filed with the Commission.\782\ We believe that including this 
exhibit is important in assisting retail investors to assess changes 
that may impact their accounts or their relationships with their firm 
or financial professional. A retail investor will be able to find the 
latest version of the relationship summary through Investor.gov and on 
the firm's website, if it has one, and firms will be required to 
deliver a relationship summary within 30 days upon the retail 
investor's request, as proposed.\783\
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    \781\ General Instruction 8.C. to Form CRS (``Each amended 
relationship summary that is delivered to a retail investor who is 
an existing client or customer must highlight the most recent 
changes by, for example, marking the revised text or including a 
summary of material changes. The additional disclosure showing 
revised text or summarizing the material changes must be attached as 
an exhibit to the unmarked amended relationship summary.''). As an 
addition to the proposal, we are also amending General Instruction 4 
to Form ADV to mirror this requirement (``You must include an 
exhibit highlighting the most recent changes required by Form ADV, 
Part 3 (Form CRS), General Instruction 8.C.''); see also supra 
footnotes 673-677 and accompanying text.
    \782\ General Instruction 8.A. to Form CRS; see also General 
Instruction 4 to Form ADV.
    \783\ Advisers Act rules 204-5(b)(3) and 204-5(b)(5) and 
Exchange Act rules 17a-14(c)(3) and 17a-14(c)(5); General 
Instruction 9.B. to Form CRS.
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    As discussed in the proposal, for purposes of the requirement to 
communicate updates to the

[[Page 33555]]

relationship summary, 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, a broker-dealer 
will 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 continue to believe 
this approach will facilitate broker-dealers building upon their 
current compliance infrastructure in identifying existing customers 
\784\ and will enhance investor protections to retail investors 
engaging the financial services of broker-dealers.
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    \784\ 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).
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D. Transition Provisions

    To provide adequate notice and opportunity to comply with the 
adopted relationship summary filing requirements, firms that are 
registered, or investment advisers who have an application for 
registration pending, with the Commission prior to June 30, 2020 will 
have a period of time beginning on May 1, 2020 until June 30, 2020 to 
file their initial relationship summaries with the Commission.\785\ On 
and after June 30, 2020, newly registered broker-dealers will be 
required to file their relationship summary with the Commission by the 
date on which their registration with the Commission becomes effective, 
and the Commission will 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.\786\ The adopted transition period is longer than we 
proposed. The proposal would have required broker-dealers to comply 
with their relationship summary obligations beginning six months after 
the effective date of the new rules and rule amendments.\787\ 
Similarly, in the proposal, investment advisers or dual registrants 
would have been required to comply with the new filing requirements as 
part of the firm's next annual updating amendment to Form ADV that 
would have been required after six months after the rule's effective 
date.\788\ The extended time to comply with the relationship summary 
requirements reflects our consideration of comments we received from 
firms and the modifications to the proposed requirements of the 
relationship summary.
---------------------------------------------------------------------------

    \785\ See Exchange Act rule 17a-14(f), Advisers Act rules 203-
1(a)(2) and 204-1(e); Instruction 7.C. to Form CRS.
    \786\ See Exchange Act rule 17a-14(f) and Advisers Act rule 203-
1(a)(2); Instruction 7.C. to Form CRS.
    \787\ See Proposed Instruction 5.c. to Form CRS. See Advisers 
Act proposed rule 203-1(a)(2) and Exchange Act proposed rule 17a-14 
(f)(1).
    \788\ See id.
---------------------------------------------------------------------------

    In the proposal, we asked for comment on the proposed 
implementation requirements and whether the six-month period was enough 
time for newly registered broker-dealers and investment advisers to 
prepare an initial relationship summary.\789\ A number of commenters 
requested a longer implementation period, ranging from 12 to 24 months 
from the effective date.\790\ One commenter suggested a phased-in 
approach, such that requirements may be effected at different points in 
time.\791\ Commenters cited a number of reasons for a longer 
implementation period, including the time needed to hire additional 
staff and create and deploy new disclosures, procedures, training, and 
technology,\792\ as well as to have the opportunity to apply innovative 
technology and designs.\793\
---------------------------------------------------------------------------

    \789\ See Proposing Release.
    \790\ See, e.g., IAA Letter I (requesting a 12 month 
implementation period from the effective date); CCMC Letter 
(requesting 18 months); IRI Letter (requesting 18-24 months); 
Comment Letter of HD Vest Financial Services (Aug. 7, 2018) 
(``HDVest Letter'') (requesting 18 months); Cetera Letter I; SIFMA 
Letter (requesting at least 24 months from the date the final rules 
are approved).
    \791\ See SIFMA Letter.
    \792\ See HDVest Letter.
    \793\ See IAA Letter I.
---------------------------------------------------------------------------

    We are mindful of the time needed to create the relationship 
summary, as well as to update a firm's policies, procedures, and 
systems in order to provide these new disclosures. We are, however, 
lengthening the time that firms will have to comply relative to the 
proposal after considering commenters' suggestions for a longer 
implementation period. We expect that approximately twelve months will 
be adequate for firms to conduct the requisite operational changes to 
their systems and to establish internal processes to satisfy their 
relationship summary obligations.
    Some commenters expressed the view that the proposed one-time, 
initial delivery to existing clients and customers is not 
necessary.\794\ One survey reported, on the other hand, that over 90% 
of survey respondents with an existing financial professional 
relationship stated that they knew more about their relationship with 
the adviser after reading the proposed relationship summary.\795\ We 
believe the information contained in the relationship summary could 
improve existing investors' ability to monitor and make more informed 
decisions related to their existing relationships with firms during 
their duration, including whether to terminate a relationship. For 
example, as discussed above in Section II.A., retail investors that may 
learn of account types whose minimum requirements they did not meet 
when they first opened their existing account, through a one-time, 
initial delivery to existing clients and customers. Upon seeing this 
range of options, existing clients and customers could seek to take 
advantage of cost savings or additional services offered through these 
other account types. We believe that existing clients and customers 
would benefit from this one-time delivery of the relationship summary 
and therefore are adopting the requirement as proposed. Firms will be 
required to deliver their relationship summary to new and prospective 
clients and customers who are retail investors as of the date by which 
they are first required to electronically file their relationship 
summary with the Commission.\796\ In addition, as proposed, firms will 
be required, as part of the transition, to

[[Page 33556]]

deliver their relationship summaries to all 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.\797\
---------------------------------------------------------------------------

    \794\ See, e.g., Fidelity Letter (existing customers are already 
familiar with the services offered to them by their broker-dealer or 
investment adviser. . . but can of course access a copy posted on 
the firm's website); AXA Letter (delivering the relationship summary 
to existing customers is likely to be confusing); Cetera Letter I 
(firms should not be required to deliver a new or amended Form CRS 
to [existing] clients except in limited circumstances, such as when 
the client establishes a different type of account than they already 
have).
    \795\ See Cetera Letter II (Woelfel), supra footnote 17 (84% of 
respondents stated that they knew a lot or a little more about their 
financial adviser after reviewing the Form CRS than they did before; 
among respondents with current relationships with a broker or 
adviser, over 90% said they knew more); see also CCMC Letter 
(investor polling), supra footnote 21 (in a survey of investors with 
investments outside of a work sponsored 401(k), pension or personal 
real estate, 72% of participants responding to a question describing 
that new rules could require financial professionals to deliver '' a 
standardized four page document that explains the relationship 
between the financial professional and clients'' agreed that the new 
disclosure document ``will boost transparency and help build 
stronger relationships between me and my financial professional'' 
and 62% indicated that they were ``very interested'' in reading the 
document).
    \796\ See Advisers rule 204-5(e)(2) and Exchange Act rule 17a-
14(f)(4); Instruction 7.C.iii. to Form CRS.
    \797\ See Advisers rule 204-5(e)(1) and Exchange Act rule 17a-
14(c) and (f)(3); adopted Instruction 7.C.iv. to Form CRS.
---------------------------------------------------------------------------

E. Recordkeeping Amendments

    We are adopting amendments to the recordkeeping and record 
retention requirements under Advisers Act rule 204-2 and Exchange Act 
rules 17a-3 and 17a-4, as proposed. These rules set forth requirements 
for firms to make, maintain, and preserve specified books and records. 
Pursuant to paragraph (a)(14)(i) of Advisers Act Rule 204-2 as amended, 
investment advisers will be required to make and preserve a record of 
the dates that each relationship summary was given to any client or 
prospective client who subsequently becomes a client.\798\ New 
paragraph (a)(24) of Exchange Act Rule 17a-3 as adopted will require 
broker-dealers to create a record of the date on which each 
relationship summary was provided to each retail investor, including 
any relationship summary provided before such retail investor opens an 
account.\799\ In addition, paragraph (a)(14)(i) of Advisers Act rule 
204-2, as amended, will require investment advisers to retain copies of 
each relationship summary and each amendment or revision thereto while 
paragraph (e)(10) of Exchange Act rule 17a-4, as amended, will require 
broker-dealers to maintain and preserve a copy of each version of the 
relationship summary as well as the records required to be made 
pursuant to new paragraph (a)(24) of Exchange Act rule 17a-3 as adopted 
by the Commission.\800\ The amended rules set forth the manner in which 
and the period of time for which these record must be retained.\801\ 
These records will facilitate the Commission's ability to inspect for 
and enforce compliance with the relationship summary requirements.
---------------------------------------------------------------------------

    \798\ See amended Advisers Act rule 204-2(a)(14)(i).
    \799\ See Exchange Act rule 17a-3(a)(24).
    \800\ The effect of the amended and adopted rules will require 
both investment advisers and broker-dealers to maintain copies of 
all versions of the relationship summary and the dates they are 
provided or given to existing or prospective retail customers; see 
also General Instruction 6.A. to Form CRS (requiring firms to 
maintain a copy of each version of the relationship summary and make 
it available to the SEC staff upon request). The Commission notes 
that pursuant to Exchange Act rule 17a-3(e), for purposes of 
transactions in municipal securities by municipal securities broker-
dealers, compliance with Rule G-8 of the Municipal Securities 
Rulemaking Board (``MSRB'') will be deemed to be in compliance with 
the recordkeeping requirements for broker-dealers. Accordingly, for 
purposes of transactions in municipal securities, a broker-dealer 
may satisfy its recordkeeping obligations under Exchange Act rule 
17a-3(a)(24), as adopted, by complying with Rule G-8 of the MSRB. 
See Exchange Act rule 17a-3(e).
    \801\ Investment advisers will be required to maintain and 
preserve these records in an easily accessible place for a period of 
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. See Advisers Act 
rule 204-2(e)(1). Broker-dealers will be required to maintain these 
records in an easily accessible place until six years after such 
record or relationship summary is created. See Exchange Act rules 
17a-3(a)(24) and 17a-4(e)(10) as amended.
---------------------------------------------------------------------------

    We received no comments on the proposed manner and time period for 
records preservation or the requirement to maintain a copy of each 
version of the relationship summary and each amendment or revision to 
the relationship summary.\802\ We are adopting these requirements as 
proposed. Some commenters expressed concern with the potential costs 
and feasibility of complying with the proposed recordkeeping 
requirements for broker-dealers.\803\ Several commenters argued that 
keeping records of when a relationship summary was given to a 
prospective retail investor would be unnecessarily burdensome for firms 
and would likely provide de minimis benefits.\804\ Some investment 
adviser and broker-dealer commenters stated that most firms' 
recordkeeping systems and procedures are not designed to maintain 
records relating to prospective clients and that conforming such 
systems and procedures to the proposed rule requirements would be 
burdensome and costly and would not result in an offsetting 
benefit.\805\ Others noted they may have to retain records for an 
indefinite length of time because their interactions with prospective 
clients about engaging services often span weeks, months or years and 
may include numerous phone calls, meetings or other forms of 
contact.\806\
---------------------------------------------------------------------------

    \802\ See Exchange Act rule 17a-4(e)(10) as proposed to be 
amended and Advisers Act rule 204-2(e)(1) (which would apply to 
amended rule 204-2(a)(14)(i) as proposed to be amended). The 
recordkeeping requirements for investment advisers will mirror the 
current recordkeeping requirements for Form ADV Part 2. See Advisers 
Act amended rule 204-2(a)(14)(i) as proposed to be amended and rule 
204-2(e)(1).
    \803\ See, e.g., CCMC Letter; Committee of Annuity Insurers 
Letter; Edward Jones Letter; Morgan Stanley Letter; Primerica 
Letter; SIFMA Letter; IPA Letter.
    \804\ See id.
    \805\ See, e.g., Committee of Annuity Insurers Letter; Edward 
Jones Letter; Morgan Stanley Letter; Primerica Letter; SIFMA Letter.
    \806\ See, e.g., Edward Jones Letter; Primerica Letter; SIFMA 
Letter.
---------------------------------------------------------------------------

    As an alternative, commenters suggested that firms only be required 
to maintain a record of the most recent date they delivered the 
relationship summary to a prospective client that becomes an actual 
client preceding the opening of an account.\807\ Commenters suggested 
only requiring a record that the relationship summary was delivered at 
account opening or when a retail investor becomes an investment 
advisory client.\808\
---------------------------------------------------------------------------

    \807\ See, e.g., CCMC Letter; SIFMA Letter.
    \808\ See, e.g., SIFMA Letter; Morgan Stanley; Edward Jones 
Letter.
---------------------------------------------------------------------------

    Based on our experience with similar recordkeeping requirements for 
the Form ADV Part 2A brochure, requiring firms to create and maintain 
records of the dates they provide or give a relationship summary to an 
existing, new, or potential retail investor will facilitate examiners' 
ability to inspect and examine for compliance with the relationship 
summary delivery and content requirements. Specifically, the dates will 
help examiners to identify the relationship summary disclosures that 
retail investors may have relied on to decide whether to engage a 
firm's services. Absent having these dates to examine, we believe that 
it would be exceedingly difficult for examiners to evaluate firms' 
compliance with the relationship summary delivery and content 
requirement. These records also may assist firms in monitoring their 
compliance with the relationship summary delivery requirements.
    Recordkeeping obligations for the relationship summary may be less 
burdensome if firms' recordkeeping and compliance systems are already 
capable of creating and maintaining records related to communications 
with prospective clients. For example, investment advisers are required 
to keep similar records for the delivery of the Form ADV Part 2A 
brochure \809\ and broker-dealers, especially those registered with 
FINRA, are subject to comparable recordkeeping requirements with 
respect to communications and correspondence with prospective retail 
investors.\810\
---------------------------------------------------------------------------

    \809\ See, e.g., Advisers Act rule 204-2.
    \810\ See, e.g., Exchange Act rule 17a-4(b)(4) requiring broker-
dealers to maintain a record of all communications sent relating to 
its business as such; see also, e.g., FINRA Rule 2210(a)(5) 
(defining ``retail communication'' to mean ``any written (including 
electronic) communication that is distributed or made available to 
more than 25 retail investors within any 30 calendar-day period.''); 
FINRA Rule 2210(b)(4) (requiring all FINRA members to ``maintain all 
retail communications and institutional communications for the 
retention period required by SEA Rule 17a-4(b) and in a format and 
media that comply with SEA Rule 17a-4 . . . [and] . . . all 
correspondence in accordance with the record-keeping requirements of 
[FINRA] Rules 3110.09 [on supervision, requiring FINRA members to 
retain the internal communications and correspondence of associated 
persons relating to the member's investment banking or securities 
business for the period of time and accessibility specified in SEA 
Rule 17a-4(b)] and 4511 [establishing general requirements for 
members to ``preserve books and records as required under the FINRA 
rules, the Exchange Act and the applicable Exchange Act rules'']).

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

[[Page 33557]]

    Several firms also requested clarification and expressed concern 
regarding the potential recordkeeping implications related to the ``Key 
Questions to Ask'' provision of the proposal.\811\ Some commenters 
stated that requiring firms to make and maintain records of their 
answers to the ``Key Questions to Ask'' and of supplemental information 
cross-referenced in or linked from the relationship summary would 
result in substantial and unnecessary burdens and/or might stifle 
potentially beneficial discussions between firms, clients and/or 
prospective clients.\812\ Commenters requested clarification that ``Key 
Questions to Ask'' are intended to promote dialog between firms and 
clients rather than creating any sort of recordkeeping requirement, 
which commenters believed could lead to less robust discussions between 
firms and clients.\813\
---------------------------------------------------------------------------

    \811\ See, e.g., CCMC Letter; TIAA Letter; LPL Financial Letter; 
IPA Letter; NSCP Letter.
    \812\ See, e.g., Edward Jones Letter; CCMC Letter; NSCP Letter; 
SIFMA Letter; Morgan Stanley Letter; TIAA Letter; LPL Financial 
Letter.
    \813\ See, e.g., Edward Jones Letter; CCMC Letter; TIAA Letter; 
LPL Financial Letter.
---------------------------------------------------------------------------

    As discussed above, the ``Key Questions to Ask'' section of the 
relationship summary has been eliminated, but firms will be required to 
include ``conversation starters'' in their relationship summary.\814\ 
We are not establishing new or separate recordkeeping obligations 
related to the conversation starters or the answers provided by firms 
in response to the conversation starters. We are also not adding 
separate or new recordkeeping obligations related to the use of layered 
disclosure in the relationship summary. Current recordkeeping rules for 
investment advisers and broker-dealers already impose recordkeeping and 
retention requirements related to a firm's disclosures and other 
communications with retail investors, which will include responses to 
conversation starters or information cross-referenced in the 
relationships summary.\815\ Responses to conversation starters or 
hyperlinked material may trigger recordkeeping requirements under other 
federal securities statutes and rules or the rules of self-regulatory 
organizations of which firms are members or registrants.\816\ Further, 
firms may wish to develop scripts for their financial professionals in 
responding to conversation starters to ensure the quality and 
consistency of responses and then preserve the scripts for compliance 
purposes.
---------------------------------------------------------------------------

    \814\ See supra Section II.A.4.
    \815\ For example, with respect to investment advisers, if a 
conversation starter prompts a written communication that includes a 
recommendation made or proposed to be made or any advice given or 
proposed to be given by the investment adviser, such a communication 
may be subject to the recordkeeping requirements of Advisers Act 
rule 204-(2)(a)(7). Also, for example, broker-dealers, under 
Exchange Act Rule 17a-4(b)(4), are required to maintain records of 
the ``[o]riginals of all communications received and copies of all 
communications sent (and any approvals thereof) by the member, 
broker or dealer (including inter-office memoranda and 
communications) relating to its business as such. . .''; see also 
the recordkeeping requirements of FINRA Rule 2210.
    \816\ See id.
---------------------------------------------------------------------------

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

    In connection with Form CRS, we recognized that 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.\817\ This concern was 
particularly acute where such communications 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.\818\ To mitigate these 
concerns, we proposed additional rules as part of the Proposing 
Release. One of our proposed rules required disclosure of a firm's 
regulatory status and a financial professional's association with a 
firm. Specifically, we proposed rules under the Exchange Act and the 
Advisers Act that would have required a broker-dealer and an investment 
adviser to prominently disclose that it is registered as a broker-
dealer or investment adviser, as applicable, with the Commission in 
print or electronic retail investor communications.\819\ The proposed 
Exchange Act rule also would have required 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.\820\ Similarly, the 
proposed Advisers Act rule would have required 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.\821\ As we discussed in the Proposing Release, we 
believed that requiring a firm to disclose whether it is a broker-
dealer or an investment adviser in print or electronic retail investor 
communications would assist retail investors in determining which type 
of firm is more appropriate for their specific investment needs.\822\ 
For similar reasons, we noted 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.\823\
---------------------------------------------------------------------------

    \817\ See Proposing Release, supra footnote 5, at footnotes 374-
375 and accompanying text.
    \818\ See id.
    \819\ See id., at footnotes 437-439 and accompanying text.
    \820\ See id.
    \821\ See id.
    \822\ See Proposing Release, supra footnote 5, at footnotes 440-
441 and accompanying text.
    \823\ See id. We also proposed rules that would have restricted 
broker-dealers and their associated persons from using the terms 
``adviser'' or ``advisor'' as part of a name or title when 
communicating with retail investors in certain circumstances. We are 
not adopting those rules, as further discussed in the Regulation 
Best Interest Release. See Regulation Best Interest Release, supra 
footnote 47.
---------------------------------------------------------------------------

    Several commenters expressed general support for the proposed 
Affirmative Disclosures.\824\ Some of these commenters believed that 
the rules could be beneficial in helping investors to understand the 
legal distinctions between broker-dealers and investment advisers.\825\ 
Another commenter in support of the Affirmative Disclosures stated that 
investors would benefit more if they were also provided with readily 
accessible regulatory and disciplinary histories of the financial 
professional.\826\ However, one commenter noted that while ``the 
required disclosure could have some modest benefit, . . . it is 
important not to overstate [its] likely value.'' \827\
---------------------------------------------------------------------------

    \824\ See CFA Letter I; CFA Institute Letter I (stating that 
``[r]equiring them to call themselves what they legally are will 
enable investors to better understand the distinction''); Better 
Markets Letter.
    \825\ See CFA Institute Letter I; CFA Letter I; LPL Financial 
Letter.
    \826\ See Better Markets Letter.
    \827\ See CFA Letter I.
---------------------------------------------------------------------------

    Several commenters also opposed the Affirmative Disclosures.\828\ 
Some commenters believed that the proposed rules were duplicative, 
noting that

[[Page 33558]]

Regulation Best Interest, Form CRS, and/or other required disclosure 
obligations (e.g., Form ADV, FINRA Rule 2210) would inform retail 
investors of the capacity of a firm and its financial professionals, 
obviating the need for the additional rules.\829\ Some of these 
commenters stated that Form CRS alone or in combination with FINRA Rule 
2210(d)(3) (providing specific requirements for disclosure of the 
broker-dealer's name in retail communications and correspondence) would 
provide retail investors with a firm's capacity and its name, making 
the Affirmative Disclosures duplicative.\830\
---------------------------------------------------------------------------

    \828\ Some commenters also opposed the proposed Affirmative 
Disclosures because investors do not understand what it means to be 
registered or what the legal terms mean. See Altruist Letter; IRI 
Letter. See also LPL Financial Letter (noting that regulatory status 
is not important to an investor when being casually introduced for 
the first time to a financial professional and receiving a business 
card); Bank of America Letter; SIFMA Letter.
    \829\ See, e.g., LPL Financial Letter (stating that Form ADV, 
Form CRS, and Regulation Best Interest already ``communicate to 
investors the capacity in which they are acting on behalf of the 
investor and the material facts related to the investor's 
relationship with the firm and its financial professionals.''); 
SIFMA Letter (stating that ``information regarding regulatory status 
is contained in Proposed Form CRS, and Proposed Form CRS is 
available at all times on a firm's website, in addition to periodic 
distribution to clients.''); IRI Letter; Committee of Annuity 
Insurers Letter; Letter from Mari-Anne Pisarri, Pickard Djinis and 
Pisarri LLP (``Pickard Letter'') (stating ``the Commission should 
determine whether the existing Form ADV brochure supplement 
adequately informs retail investors of the registration status of 
the advisory representatives they deal with . . . .'')
    \830\ See, e.g., IRI Letter; Bank of America Letter; Committee 
of Annuity Insurers Letter. See also SIFMA Letter (noting that Form 
CRS resolves any confusion that may exist regarding whether a 
financial professional or firm is a broker-dealer or an investment 
adviser and would be available on a firm website and given 
periodically to investors).
---------------------------------------------------------------------------

    Several commenters also opposed the Affirmative Disclosures because 
they believed the costs to implement and comply with the proposed rules 
did not justify the benefits.\831\ In particular, these commenters 
noted a range of cost-related impacts, such as replacing new and 
existing business cards \832\ and amending numerous electronic and 
print marketing materials.\833\ Several commenters also noted the 
difficultly in implementing and supervising specific types of 
communication including business cards, oral communications, and voice 
overlay and on-screen text in televised or video presentations.\834\
---------------------------------------------------------------------------

    \831\ See, e.g., LPL Financial Letter; Bank of America Letter; 
IRI Letter; SIFMA Letter.
    \832\ See IRI Letter. See also SIFMA Letter (noting also that 
firms would need to reprint all business cards and modify ``firm 
technologies and electronic communications'').
    \833\ See LPL Financial Letter (noting ``significant financial 
costs'').
    \834\ See Bank of America Letter; IRI Letter; SIFMA Letter; 
Altruist Letter. See also Committee of Annuity Insurers Letter 
(noting also that there are operational challenges in situations 
where marketing materials or account statements are used or 
distributed by a product sponsor rather than the firm itself).
---------------------------------------------------------------------------

    After considering the comments received and the obligations we are 
adopting under Regulation Best Interest and Form CRS, we have concluded 
that the capacity disclosure requirement in Regulation Best Interest 
and Form CRS are sufficient to achieve the objectives of the proposed 
Affirmative Disclosures. These rules enhance retail investor awareness 
of the firm and professional type that they are engaging or seeking to 
engage and would therefore assist a retail investor in choosing the 
type that best suits his or her financial goals.
    As discussed in the Regulation Best Interest Release, as part of 
its disclosure obligations, a broker-dealer and its associated natural 
persons must disclose when they are acting as a broker-dealer when 
making a recommendation. This type of disclosure is designed to improve 
awareness among retail customers such that a retail customer can more 
readily identify and understand their relationship.\835\ This capacity 
disclosure requires a broker-dealer and its financial professionals to 
disclose that the firm or the financial professional is acting as a 
broker-dealer, as a material fact relating to the scope and terms of 
the relationship subject to its disclosure obligation.\836\ As noted in 
the Regulation Best Interest Release, a broker-dealer and its financial 
professionals must disclose the required information prior to or at the 
time of a recommendation but Regulation Best Interest does not mandate 
the form, specific time, or method of delivering disclosures pursuant 
to its disclosure obligation.\837\ In fulfilling this obligation, a 
broker-dealer that is not a dual registrant generally will be able to 
satisfy the requirement to disclose the broker-dealer's capacity by 
delivering the Relationship Summary to the retail customer. For broker-
dealers who are dually registered, and for associated persons who are 
either dually licensed or are not dually licensed and only offer 
broker-dealer services through a firm that is dually registered, the 
information contained in the Relationship Summary will not be 
sufficient to disclose their capacity in making a recommendation.\838\ 
As discussed in the Regulation Best Interest Release, although some 
commenters expressed concerns about potential investor confusion caused 
by ``additional'' disclosure regarding a dual registrant's capacity, 
the disclosure obligations of Regulation Best Interest will not 
duplicate or confuse, but instead will provide clarifying detail on 
capacity to supplement the information contained in the Relationship 
Summary.\839\
---------------------------------------------------------------------------

    \835\ See Regulation Best Interest Release, supra footnote 47, 
at Section II.C.1.a.
    \836\ See id.
    \837\ See id.
    \838\ See id.
    \839\ See id.
---------------------------------------------------------------------------

    Additionally, as discussed above, Form CRS includes a requirement 
for firms to state their name and whether they are ``registered with 
the Securities and Exchange Commission as a broker-dealer, investment 
adviser, or both.'' \840\ Form CRS is required to be delivered before 
or at the time the financial professional enters into an investment 
advisory relationship or, for a broker-dealer, before or at the 
earliest of a certain recommendation, the execution of a securities 
transaction, or the opening of a brokerage account.\841\ Additionally, 
Form CRS will need to be prominently posted on the firm's public 
website, if it maintains one, in a location and format that is easily 
accessible to retail investors \842\ and must be provided to retail 
investors 60 days after a material change is made.\843\ These 
requirements highlight for an investor's attention, and promote access 
to, the capacity information at times that we believe are crucial to a 
retail investor when seeking to make a choice of financial firms.
---------------------------------------------------------------------------

    \840\ See Item 1.A. of Form CRS. See also supra Section II.B.1.
    \841\ See General Instruction 7.B to Form CRS. See also supra 
Section II.C.
    \842\ See General Instruction 10.A. to Form CRS. See also supra 
Section II.C.3.a.
    \843\ See General Instruction 8.B. to Form CRS. See also supra 
Section II.C.4. In addition, the most recent versions of firms' 
relationship summaries will be accessible through Investor.gov. See 
supra footnote 698 and accompanying text.
---------------------------------------------------------------------------

    We recognize that the proposed Affirmative Disclosures would have 
included capacity requirements on more communications than what is 
required by Form CRS and capacity disclosure requirement in Regulation 
Best Interest. Specifically, under the Affirmative Disclosures, all 
forms of communications used by broker-dealers, investment advisers and 
their financial professionals, such as business cards, letterheads, 
social media profiles, and signature blocks would have included these 
required capacity disclosures. However, several commenters questioned 
whether the benefit provided by covering more communications justified 
the costs of implementing the requirements.\844\

[[Page 33559]]

While commenters did not provide quantitative data that would 
demonstrate the cost impact on firms, certain commenters did describe 
the scope of the impact along with the operational challenges in 
implementing the rule.\845\ One commenter stated that ``the costs of 
such requirement would be significant'' as firms would need to reprint 
all business cards to include this disclosure and make changes to firm 
technology and electronic communications to make the disclosure.\846\ 
Additionally, another commenter stated that adding a voice overlay and 
on-screen text for video presentations would be difficult to implement, 
costly, and challenging to supervise.\847\
---------------------------------------------------------------------------

    \844\ See, e.g., IRI Letter (stating that the costs to amend 
``tens of thousands of business cards to add the new required 
disclosure outweighs any intended benefit, particularly since the 
Form CRS already accomplishes the same objective . . .''); Committee 
of Annuity Insurers Letter (stating that the Affirmative Disclosure 
rules provide little benefit to investors and present operational 
challenges with respect to marketing materials created by product 
sponsors or issuers); LPL Financial Letter (noting that the benefits 
of these rules are outweighed by the ``significant financial cost'' 
to amend ``numerous electronic and print marketing materials, 
business cards, and other retail customer communications.'')
    \845\ See IRI Letter (noting that a voice overlay and on-screen 
text may be difficult to implement and to effectively supervise. 
Additionally, firms will incur ``significant costs and resources to 
monitor such presentations'' for the required disclosures ``even 
though that same client already received the Form CRS 
disclosure.''); LPL Financial Letter. See also Bank of America 
Letter (``the [Affirmative Disclosure rules] will impose significant 
costs to implement since tens of thousands of business cards will 
need to be amended in order to add the new required disclosures.'')
    \846\ See SIFMA Letter (noting that ``we do not believe the 
regulatory status disclosure would have an obvious benefit to 
investors. At the same time, the costs of such a requirement would 
be significant.'')
    \847\ See Bank of America Letter (stating further that ``it 
would be virtually impossible to supervise whether [the required] 
disclosure was made in oral communications.''); see also Altruist 
Letter (stating that including the disclosure in oral communications 
would be ``awkward for a practitioner to implement.''); Committee of 
Annuity Insurers Letter (stating that ``it may not be feasible for a 
broker-dealer to include this information on marketing materials for 
investment products created and provided by a product sponsor.'')
---------------------------------------------------------------------------

    After considering the comments received and the obligations we are 
adopting under Regulation Best Interest and Form CRS, we have concluded 
that the policy concerns underlying the Affirmative Disclosures are 
addressed by the rulemaking package we are adopting, particularly the 
disclosure obligations in Regulation Best Interest and Form CRS, as 
discussed above.\848\ We therefore believe that the costs of the 
Affirmative Disclosures do not justify any incremental benefit of 
requiring registration status on all communications and as a result, we 
are not adopting the Affirmative Disclosures.
---------------------------------------------------------------------------

    \848\ See Regulation Best Interest Release, supra footnote 47.
---------------------------------------------------------------------------

IV. Economic Analysis

A. Introduction

    The Commission is sensitive to the economic effects, including the 
benefits and costs and the effects on efficiency, competition, and 
capital formation that will result from the new rules and amendments to 
existing 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.\849\ 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.\850\ 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.\851\
---------------------------------------------------------------------------

    \849\ See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f).
    \850\ See 15 U.S.C. 78w(a)(2).
    \851\ 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, to also 
consider whether the action will promote efficiency, competition, and 
capital formation, in addition to the protection of investors.\852\ 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 not feasible due to lack of relevant data, or the 
difficulty of predicting how market participants would act under the 
conditions of the proposed rules. For example, to the extent that the 
relationship summary will increase retail investors' understanding of 
the services provided to them, investors are likely to respond 
differently to the increased understanding. Such responses could be 
transferring to a different financial firm or professional, hiring a 
financial professional for the first time, not taking any action, 
deciding to invest on their own without advice, or entirely abandoning 
the brokerage or investment advisory market while moving their assets 
to other products or markets (e.g., bank deposits or insurance 
products). Given the number and complexity of assumptions that would be 
required to be able to estimate how the relationship summary will 
affect investors' understanding and their decision-making, the 
Commission is not able to estimate the propensity of investors to 
respond in one way or another.
---------------------------------------------------------------------------

    \852\ 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. 
The economic effects of the adopted changes are discussed below.

B. Baseline

    This section discusses, as it relates to this rulemaking, the 
current state of the broker-dealer and investment adviser markets, the 
current regulatory environment, and the current state of retail 
investor perceptions in the market.

[[Page 33560]]

1. Providers of Financial Services \853\
---------------------------------------------------------------------------

    \853\ In addition to broker-dealers and Commission-registered 
investment advisers discussed below in the baseline, there are a 
number of other entities, such as state registered investment 
advisers, commercial banks and bank holding companies, and insurance 
companies, which also provide financial advice services to retail 
customers; however, because of unavailability of data, the 
Commission is unable to estimate the number of some of those other 
entities that are likely to provide financial advice to retail 
customers. A number of broker-dealers (see infra footnote 862) have 
non-securities businesses, such as insurance or tax services. As of 
December 2018, there are approximately 17,300 state-registered 
investment advisers. The Department of Labor in its Regulatory 
Impact Analysis identifies approximately 398 life insurance 
companies that could provide advice to retirement investors. See 
U.S. Department of Labor, Regulating Advice Markets: Definition of 
the Term `Fiduciary,' Conflicts of Interest, Retirement Investment 
Advice: Regulatory Impact Analysis for Final Rule and Exemptions 
(Apr. 2016), available at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf (``Regulatory Impact Analysis'')
---------------------------------------------------------------------------

a. Broker-Dealers
    This rule will affect registrants in the market for broker-dealer 
services, including dual registrants \854\ and broker-dealers offering 
services to retail investors that are affiliated with an investment 
adviser.\855\ The market for broker-dealer services encompasses a small 
set of large and medium sized broker-dealers and thousands of smaller 
broker-dealers competing for niche or regional segments of the 
market.\856\ The market for broker-dealer services includes many 
different markets for a variety of services, including, but not limited 
to, managing orders for customers and routing them to various trading 
venues; providing advice to customers that is in connection with and 
reasonably related to their primary business of effecting securities 
transactions; holding retail customers' funds and securities; handling 
clearance and settlement of trades; intermediating between retail 
customers and carrying/clearing brokers; dealing in corporate debt and 
equities, government bonds, and municipal bonds, among others; 
privately placing securities; and effecting transactions in mutual 
funds that involve transferring funds directly to the issuer. Some 
broker-dealers may specialize in just one narrowly defined service, 
while others may provide a wide variety of services.
---------------------------------------------------------------------------

    \854\ Not all firms that are dually registered as an investment 
adviser and a broker-dealer offer both brokerage and advisory 
accounts to retail investors. For example, some dually registered 
firms offer advisory accounts to retail investors but offer only 
brokerage services, such as underwriting services, to institutional 
clients. For the purposes of the relationship summary, we define a 
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. General 
Instruction 11.C to Form CRS.
    \855\ Some broker-dealers may be affiliated with investment 
advisers but are not dually registered. From Question 10 on Form BD, 
2,098 (55.7%) broker-dealers report that directly or indirectly, 
they control, are controlled by, or are under common control with an 
entity that is engaged in the securities or investment advisory 
business. Comparatively, 2,421 (18.2%) SEC-registered investment 
advisers report an affiliate that is a broker-dealer in Section 7A 
of Schedule D of Form ADV, including 1,878 SEC-registered investment 
advisers that report an affiliate that is a registered broker-
dealer. Approximately 77% of total regulatory assets under 
management of investment advisers are managed by these 2,421 SEC-
registered investment advisers.
    \856\ See Risk Management Controls for Brokers or Dealers with 
Market Access, Securities Exchange Act Release No. 63241 (Nov. 3, 
2010) [75 FR 69791 (Nov. 15, 2010)]. For simplification, we present 
our analysis as if the market for broker-dealer services encompasses 
one broad market with multiple segments, even though, in terms of 
competition, it could also be discussed in terms of numerous 
interrelated markets.
---------------------------------------------------------------------------

    As of December 2018, there were approximately 3,764 registered 
broker-dealers with over 140 million customer accounts. In total, these 
broker-dealers have over $4.3 trillion in total assets, which are total 
broker-dealer assets as reported on Form X-17a-5.\857\ More than two-
thirds of all brokerage assets and close to one-third of all customer 
accounts are held by the 17 largest broker-dealers, as shown in Table 
1, Panel A.\858\ Of the broker-dealers registered with the Commission 
as of December 2018, 359 broker-dealers are dually registered as 
investment advisers.\859\ These firms hold over 90 million (63%) 
customer accounts. Approximately 539 broker-dealers (14%) report at 
least one type of non-securities business, including insurance, 
retirement planning, mergers and acquisitions, and real estate, among 
others.\860\ Approximately 73.5% of registered broker-dealers report 
retail customer activity.\861\
---------------------------------------------------------------------------

    \857\ 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.
    \858\ Approximately $4.27 trillion of total assets of broker-
dealers (99%) are at firms with total assets in excess of $1 
billion. Of the 39 dually registered broker-dealers with total 
assets in excess of $1 billion, total assets for these dually 
registered broker-dealers are $2.32 trillion (54%) of aggregate 
broker-dealer assets. Of the remaining 99 broker-dealers with total 
assets in excess of $1 billion that are not dually registered, 91 
have affiliated investment advisers.
    \859\ 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.
    \860\ We examined Form BD filings to identify broker-dealers 
reporting non-securities business. For the 539 broker-dealers 
reporting such business, staff analyzed the narrative descriptions 
of these businesses on Form BD, and identified the most common types 
of businesses: Insurance (202), management/financial/other 
consulting (99), advisory/retirement planning (71), mergers and 
acquisitions (70), foreign exchange/swaps/other derivatives (28), 
real estate/property management (30), tax services (15), and other 
(146). Note that a broker-dealer may have more than one line of non-
securities business.
    \861\ 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, this may capture some broker-
dealers that do not have retail activity, although we are unable to 
estimate that frequency.
---------------------------------------------------------------------------

    Panel B of Table 1 is limited to the broker-dealers that report 
some retail investor activity. As of December 2018, there are 
approximately 2,766 broker-dealers that served retail investors, with 
over $3.8 trillion in total assets (89% of total broker-dealer assets) 
and almost 139 million (97%) customer accounts.\862\ Of those broker-
dealers serving retail investors, 318 are dually registered as 
investment advisers.\863\
---------------------------------------------------------------------------

    \862\ 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.
    \863\ Of the 31 dually registered firms in the group of retail 
broker-dealers with total assets in excess of $500 million, total 
assets for these dually registered firms are nearly $2.32 trillion 
(60%) of aggregate retail broker-dealer assets (Table 1, Panel B). 
Of the remaining 81 retail broker-dealers with total assets in 
excess of $500 million that are not dually registered, 69 have 
affiliated investment advisers.

[[Page 33561]]



                         Table 1--Panel A: Registered Broker-Dealers as of December 2018
                          [Cumulative broker-dealer total assets and customer accounts]
----------------------------------------------------------------------------------------------------------------
                                                                   Number of                        Cumulative
                                                 Total number        dually         Cumulative       number of
     Size of broker-dealer (total assets)         of broker-       registered      total assets      customer
                                                    dealers      broker-dealers     (billion)     accounts \864\
----------------------------------------------------------------------------------------------------------------
>$50 billion..................................              17               10           $2,879      40,550,200
$1 billion to $50 billion.....................             114               22            1,363      96,037,591
$500 million to $1 billion....................              35                7               23         397,814
$100 million to $500 million..................             105               19               23       1,603,818
$10 million to $100 million...................             490              101               17       4,277,432
$1 million to $10 million.....................           1,021              130              3.6         460,748
<$1 million...................................           1,982               70              0.5           5,675
                                               -----------------------------------------------------------------
    Total \865\ \866\.........................           3,764              359            4,309     143,333,278
----------------------------------------------------------------------------------------------------------------

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

    \864\ Customer Accounts includes both broker-dealer and 
investment adviser accounts for dually-registered firms.
    \865\ The data is obtained from FOCUS filings as of December 
2018. 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 accounts in their role as 
clearing broker-dealers.
    \866\ In addition to the approximately 143 million individual 
accounts at broker-dealers, there are approximately 302,000 omnibus 
accounts (0.2% of total accounts at broker-dealers), with total 
assets of $32.1 billion, across all 3,764 broker-dealers, of which 
approximately 99% are held at broker-dealers with greater than $1 
billion in total assets. See also infra footnote 872. 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 unable to determine from the data available how many 
customer accounts non-carrying broker-dealers may have. The data 
does not allow the Commission to parse the total assets in those 
accounts to determine to whom such assets belong. Therefore, our 
estimate may be under inclusive of all customer accounts held at 
broker-dealers.

                     Table 1--Panel B: Registered Retail Broker-Dealers as of December 2018
                          [Cumulative broker-dealer total assets and customer accounts]
----------------------------------------------------------------------------------------------------------------
                                                                   Number of
                                                 Total number        dually         Cumulative      Cumulative
     Size of broker-dealer (total assets)         of retail-       registered      total assets      number of
                                                facing broker-   retail-facing      (billion)        customer
                                                    dealers      broker-dealers                      accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion..................................              16                8           $2,806      40,545,792
$1 billion to $50 billion.....................              75               18              990      91,991,118
$500 million to $1 billion....................              21                5               13         365,632
$100 million to $500 million..................              84               16               18       1,603,818
$10 million to $100 million...................             378               91               14       3,762,620
$1 million to $10 million.....................             783              120              2.8         450,132
<$1 million...................................           1,409               60              0.4           5,672
                                               -----------------------------------------------------------------
    Total BDs \867\...........................           2,766              318            3,844     138,724,784
----------------------------------------------------------------------------------------------------------------

    Table \868\ 2 reports information on brokerage commissions,\869\ 
fees, and selling concessions from the fourth quarter of 2018 for all 
broker-dealers, including dually-registered firms.\870\ We observe 
significant variation in sources of revenues for broker-dealers, with 
large broker-dealers, on average, generating substantially higher 
levels of commission and fee revenues than smaller broker-dealers. On 
average, broker-dealers, including those that are dually registered as 
investment advisers, earn about $5.1 million per quarter in revenue 
from commissions and nearly four times that amount in fees, although 
the Commission notes that fees encompass a variety of fees.\871\ 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 toward commissions for broker-dealers with less than $10 
million in assets and is weighted more heavily toward fees for broker-
dealers with assets in excess of $10 million. For example, for the 114

[[Page 33562]]

broker-dealers with assets between $1 billion and $50 billion, average 
revenues from commissions are approximately $45 million, while average 
revenues from fees are approximately $225 million.\872\
---------------------------------------------------------------------------

    \867\ Total Broker-dealers includes all retail-facing broker-
dealers, including those dual registrants that have both retail-
facing broker-dealers and retail-facing investment advisers.
    \868\ See infra footnote 1397 for how broker-dealers who engage 
in retail sales activity are identified. In addition to the 318 
retail-facing dually registered broker-dealers, we estimate 30 
broker-dealers that are registered as investment advisers but do not 
have a retail-facing investment advisory business.
    \869\ Mark-ups or mark-downs are not included as part of the 
brokerage commission revenue in FOCUS data; instead, they are 
included in Net Gains or Losses on Principal Trades, but are not 
uniquely identified as a separate revenue category.
    \870\ Source: FOCUS data.
    \871\ Fees, as detailed in the FOCUS data, include fees for 
account supervision, investment advisory services, and 
administrative services. Beyond the broad classifications of fee 
types included in fee revenue, we are unable to determine whether 
fees such as 12b-1 fees, sub-accounting, or other such service fees 
(e.g., payments by an investment company for personal services and/
or maintenance of shareholder accounts) are included. The data 
covers both broker-dealers and dually registered firms. FINRA's 
Supplemental Statement of Income, Line 13975 (Account Supervision 
and Investment Advisory Services) denotes that fees earned for 
account supervision are those fees charged by the firm for providing 
investment advisory services where there is no fee charged for trade 
execution. Investment Advisory Services generally encompass 
investment advisory work and execution of client transactions, such 
as wrap arrangements. These fees also include fees charged by 
broker-dealers that are also registered with the Commodity Futures 
Trading Commission (``CFTC''), but do not include fees earned from 
affiliated entities (Item A of question 9 under Revenue in the 
Supplemental Statement of Income).
    \872\ A rough estimate of total fees in this size category would 
be 114 broker-dealers with assets between $1 billion and $50 billion 
multiplied by the average fee revenue of $225 million, or $25.65 
billion in total fees. Divided by the number of customer accounts, 
not all of which may pay fees, in this size category (96,037,591), 
each account would be charged on average approximately $267 in fees 
per quarter, or $1,068 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 42% of total revenues earned by these firms.
    Table 2, Panel B below provides aggregate revenues by revenue type 
(commissions, fees, or selling concessions from sales of IC shares) for 
broker-dealers delineated by whether the broker-dealer is also a 
dually-registered firm. Broker-dealers dually registered as investment 
advisers have a significantly larger fraction of their revenues from 
fees other than commissions or selling concessions, whereas commissions 
are approximately 42% of the revenues of broker-dealers that are not 
dually registered.

               Table 2--Panel A: Average Broker-Dealer Revenues From Revenue Generating Activities
----------------------------------------------------------------------------------------------------------------
                                                     Number of                     Fees 873 874     Sales of IC
      Size of broker-dealer in total assets       broker-dealers    Commissions                       shares
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................              17    $170,336,258    $414,300,268     $23,386,192
$1 billion-$50 billion..........................             114      45,203,225     225,063,257      53,671,602
500 million-1 billion...........................              35       8,768,547      30,141,270       5,481,248
100 million-500 million.........................             105      12,801,889      33,726,336      16,610,013
10 million-100 million..........................             490       3,428,843       8,950,892       9,092,971
1 million-10 million............................           1,021         996,130       1,037,825         652,905
<1 million......................................           1,982         197,907         269,459          85,219
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
Average of All Broker-Dealers...................           3,764       5,092,808      21,948,551       4,368,823
----------------------------------------------------------------------------------------------------------------


Table 2--Panel B: Aggregate Total Revenues From Revenue Generating Activities for Broker-Dealers Based on Dually-
                                                Registered Status
----------------------------------------------------------------------------------------------------------------
                                                                                                    Sales of IC
               Broker-dealer type                    Number of      Commissions     Fees \875\        shares
                                                  broker-dealers     (billion)       (billion)       (billion)
----------------------------------------------------------------------------------------------------------------
Dually Registered as IAs........................             359           $4.52          $17.54           $2.63
Broker-Dealers..................................           3,405            4.16            3.25            2.57

    All.........................................           3,764            8.68           20.79            5.20
----------------------------------------------------------------------------------------------------------------

    As shown in Table 3, based on responses to Form BD, broker-dealers 
most commonly provided business lines include private placements of 
securities (62.7% of broker-dealers); retail sales of mutual funds 
(55.4%); acting as a broker or dealer retailing corporate equity 
securities over the counter (52.0%); acting as a broker or dealer 
retailing corporate debt securities (47.2%); acting as a broker or 
dealer selling variable contracts, such as life insurance or annuities 
(41.0%); acting as a broker of municipal debt/bonds or U.S. government 
securities (39.8% and 37.4%, respectively); acting as an underwriter or 
selling group participant of corporate securities (31.2%); and 
investment advisory services (26.4%); among others.\876\
---------------------------------------------------------------------------

    \873\ Fees, as detailed in the FOCUS data, include fees for 
account supervision, investment advisory services, and 
administrative services. The data covers both broker-dealers and 
dually registered firms.
    \874\The data is obtained from December 2018 FOCUS reports and 
averaged across size groups.
    \875\ See id.
    \876\ Form BD requires applicants to identify the types of 
business engaged in (or to be engaged in) that accounts for 1% or 
more of the applicant's annual revenue from the securities or 
investment advisory business. Table 3 provides an overview of the 
types of businesses listed on Form BD, as well as the frequency of 
participation in those businesses by registered broker-dealers as of 
December 2018.

 Table 3--Lines of Business at Retail Broker-Dealers as of December 2018
------------------------------------------------------------------------
                                             Number of      Percent of
                                              broker-         broker-
            Line of business                  dealers         dealers
                                              (total)         (total)
------------------------------------------------------------------------
Private Placements of Securities........           1,735            62.7
Mutual Fund Retailer....................           1,533            55.4
Broker or Dealer Retailing:
    Corporate Equity Securities OTC.....           1,438            52.0
    Corporate Debt Securities...........           1,306            47.2

[[Page 33563]]

 
    Variable Contracts..................           1,132            40.9
Municipal Debt/Bonds--Broker............           1,101            39.8
U.S. Government Securities Broker.......           1,035            37.4
Put and Call Broker or Dealer or Options             993            35.9
 Writer.................................
Underwriter or Selling Group                         862            31.2
 Participant--Corporate Securities......
Non-Exchange Member Arranging for                    785            28.4
 Transactions in Listed Securities by
 Exchange Member........................
Investment Advisory Services............             730            26.4
Broker or Dealer Selling Tax Shelters or             619            22.4
 Limited Partnerships--Primary Market...
Trading Securities for Own Account......             614            22.2
Municipal Debt/Bonds--Dealer............             475            17.2
U.S. Government Securities--Dealer......             339            12.3
Solicitor of Time Deposits in a                      308            11.1
 Financial Institution..................
Underwriter--Mutual Funds...............             237             8.6
Broker or Dealer Selling Interests in                216             7.8
 Mortgages or Other Receivables.........
Broker or Dealer Selling Oil and Gas                 207             7.5
 Interests..............................
Broker or Dealer Making Inter-Dealer                 207             7.5
 Markets in Corporate Securities OTC....
Broker or Dealer Involved in Networking,             197             7.1
 Kiosk, or Similar Arrangements (Banks,
 Savings Banks, Credit Unions)..........
Internet and Online Trading Accounts....             192             6.9
Exchange Member Engaged in Exchange                  171             6.2
 Commission Business Other than Floor
 Activities.............................
Broker or Dealer Selling Tax Shelters or             164             5.9
 Limited Partnerships--Secondary Market.
Commodities.............................             162             5.9
Executing Broker........................             107             3.9
Day Trading Accounts....................              89             3.2
Broker or Dealer Involved in Networking,              88             3.2
 Kiosk, or Similar Arrangements
 (Insurance Company or Agency)..........
Real Estate Syndicator..................              94             3.4
Broker or Dealer Selling Securities of                71              26
 Non-Profit Organizations...............
Exchange Member Engaged in Floor                      61             2.2
 Activities.............................
Broker or Dealer Selling Securities of                43             1.6
 Only One Issuer or Associate Issuers...
Prime Broker............................              21             0.8
Crowdfunding FINRA Rule 4518(a).........              21             0.8
Clearing Broker in a Prime Broker.......              14             0.5
Funding Portal..........................               8             0.3
Crowdfunding FINRA Rule 4518(b).........               5             0.2
Number of Retail-Facing Broker-Dealers..           2,766
------------------------------------------------------------------------

(1) Disclosures for Broker-Dealers

    As discussed above, broker-dealers register with and report 
information, including about their business, affiliates, and 
disciplinary history, to the Commission, Self-Regulatory Organizations 
(``SROs''), and other jurisdictions through Form BD.\877\ 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.\878\ 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.\879\ 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.\880\ In addition, firms report similar information and 
additional information to FINRA pursuant to FINRA Rule 4530.\881\
---------------------------------------------------------------------------

    \877\ See Proposing Release, supra footnote 5, at Section 
IV.A.1.i.; see also generally Form BD.
    \878\ See generally Form BD.
    \879\ See Item 11 and Disclosure Reporting Pages of Form BD.
    \880\ See Exchange Act rule 15b3-1(a).
    \881\ See Proposing Release, supra footnote 5, at Section 
II.B.7. 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).
---------------------------------------------------------------------------

    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.\882\ 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.\883\
---------------------------------------------------------------------------

    \882\ FINRA Rule 8312 governs the information FINRA releases to 
the public via BrokerCheck. See Proposing Release, supra footnote 5, 
at n.280.
    \883\ See Proposing Release, supra footnote 5, at Section 
II.B.7.

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

[[Page 33564]]

    Broker-dealers are subject to other disclosure obligations 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.\884\ Disclosure has also been a 
feature of other regulatory efforts related to financial services, 
including certain FINRA rules.\885\
---------------------------------------------------------------------------

    \884\ 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 1167, 1172 (1970); SEC v. Hasho, 
784 F. Supp. 1059, 1110 (S.D.N.Y. 1992); In the Matter of RichMark 
Capital Corp., Exchange Act Release No. 48758 (Nov. 7, 2003) (``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).
    \885\ See FINRA Requests Comment on Concept Proposal to Require 
a Disclosure Statement for Retail Investors at or Before Commencing 
a Business Relationship, FINRA Regulatory Notice 10-54 (Oct. 2010). 
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 section 
15(b)(8) of the Exchange Act 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 to, FINRA Rules 2210(d)(2) 
(communications with the public), 2260 (disclosures), 2230 (customer 
account statements and confirmations), and 2270 (day-trading risk 
disclosure statement).
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b. Investment Advisers
    As discussed above, SEC-registered investment advisers that offer 
services to retail investors will be subject to the final rule. In 
addition, although not required to comply with the final rule, state-
registered investment advisers will also be affected, because the final 
rule will impact the competitive landscape in the market for the 
provision of financial advice.\886\ This section first discusses SEC-
registered investment advisers, followed by a discussion of state-
registered investment advisers.
---------------------------------------------------------------------------

    \886\ In addition to SEC-registered investment advisers, which 
are the focus of this section, this rule could also affect banks, 
trust companies, insurance companies, and other providers of 
financial advice.
---------------------------------------------------------------------------

    As of December 2018, there are approximately 13,300 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.\887\
---------------------------------------------------------------------------

    \887\ Of the approximately 13,300 SEC-registered investment 
advisers, 8,410 (63.24%) report in Item 5.G.(2) of Form ADV that 
they provide portfolio management services for individuals and/or 
small businesses. In addition, there are approximately 17,300 state-
registered investment advisers, of which 125 are also registered 
with the Commission. Approximately 13,900 state-registered 
investment advisers are retail facing (see Item 5.D. of Form ADV).
---------------------------------------------------------------------------

    Of all SEC-registered investment advisers, 359 identify themselves 
as dually registered broker-dealers.\888\ Further, 2,421 investment 
advisers (18%) report an affiliate that is a broker-dealer, including 
1,878 investment advisers (14%) that report an SEC-registered broker-
dealer affiliate.\889\ As shown in Panel A of Table 4 below, in 
aggregate, investment advisers have over $84 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, the total number of accounts for investment advisers 
is only 29% of the number of customer accounts for broker-dealers.
---------------------------------------------------------------------------

    \888\ See supra footnote 861 and accompanying text.
    \889\ Item 7.A.1. of Form ADV.
---------------------------------------------------------------------------

    Based on staff analysis of Form ADV data as of December 2018, 
approximately 62% of registered investment advisers (8,235) have some 
portion of their business dedicated to retail investors, including both 
high net worth and non-high net worth individual clients,\890\ as shown 
in Panel B of Table 4.\891\ In total, these firms have approximately 
$41.4 trillion of assets under management.\892\ Approximately 8,200 
registered investment advisers (61%) serve over 32 million non-high net 
worth individual clients and have approximately $4.8 trillion in assets 
under management, while approximately 8,000 registered investment 
advisers (60%) serve approximately 4.8 million high net worth 
individual clients with $6.15 trillion in assets under management.\893\
---------------------------------------------------------------------------

    \890\ Data on individual clients obtained from Form ADV may not 
necessarily correspond to data on ``retail customers'' as defined in 
this rule because the data in Form ADV regarding individual clients 
does not involve any test of use for personal, family, or household 
purposes.
    \891\ We use the responses to Items 5.D.(a)(1), 5.D.(a)(3), 
5.D.(b)(1), and 5.D.(b)(3) of Part 1A of Form ADV. If at least one 
of these responses was filled out as greater than 0, the firm is 
considered as providing business to retail investors. Part 1A of 
Form ADV.
    \892\ 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.
    \893\ Estimates are based on IARD system data as of December 31, 
2018. The AUM reported here is specifically that of those non-high 
net worth clients. Of the 8,235 investment advisers serving retail 
investors, 318 are also dually registered as broker-dealers.

                   Table 4--Panel A: Registered Investment Advisers (RIAs) as of December 2018
                           [Cumulative RIA Assets Under Management (AUM) and Accounts]
----------------------------------------------------------------------------------------------------------------
                                                                     Number of
                                                                      dually      Cumulative AUM    Cumulative
        Size of investment adviser (AUM)          Number of RIAs    registered       (billion)       number of
                                                                       RIAs                          accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................             270              15         $59,264      20,655,756
$1 billion to $50 billion.......................           3,453             121          22,749      13,304,154
$500 million to $1 billion......................           1,635              47           1,151       1,413,099
$100 million to $500 million....................           5,927             119           1,397       5,135,070
$10 million to $100 million.....................           1,070              24              59         310,031
$1 million to $10 million.......................             162               3             0.8          69,664
<$1 million.....................................             782              30            0.02          13,976
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Total.......................................          13,299             359          84,621      41,081,750
----------------------------------------------------------------------------------------------------------------


[[Page 33565]]


               Table 4--Panel B: Retail Registered Investment Advisers (RIAs) as of December 2018
                           [Cumulative RIA Assets Under Management (AUM) and accounts]
----------------------------------------------------------------------------------------------------------------
                                                                   Number of                        Cumulative
       Size of investment adviser (AUM)         Number of RIAs       dually       Cumulative AUM     number of
                                                                registered RIAs     (billion)        accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion..................................             119               14          $30,291      20,592,326
$1 billion to $50 billion.....................           1,614              111            9,570      13,224,188
$500 million to $1 billion....................           1,007               44              700       1,392,842
$100 million to $500 million..................           4,548              113            1,026       5,287,584
$10 million to $100 million...................             706               23               40         308,285
$1 million to $10 million.....................             102                3              0.5          69,534
<$1 million...................................             169               10             0.02          13,946
                                               -----------------------------------------------------------------
    Total RIAs \894\..........................           8,235              318           41,434      40,887,325
----------------------------------------------------------------------------------------------------------------

    In addition to SEC-registered investment advisers, other investment 
advisers are registered with state regulators.\895\ As of December 
2018, there are 17,268 state-registered investment advisers,\896\ of 
which 125 are also registered with the Commission. Of the state-
registered investment advisers, 204 are dually registered as broker-
dealers, while approximately 4.6% (786) report a broker-dealer 
affiliate. In aggregate, state-registered investment advisers have 
approximately $334 billion in AUM. Eighty-two percent of state-
registered investment advisers report that they provide portfolio 
management services for individuals and small businesses, compared to 
just 63% for Commission-registered investment advisers.
---------------------------------------------------------------------------

    \894\ Total RIAs (1) includes all retail-facing investment 
advisers, including those dual registrants that have retail-facing 
investment advisers and retail-facing broker-dealers.
    \895\ Item 2.A. of Part 1A of Form ADV and the Advisers Act 
rules 203A-1 and 203A-2 require 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; (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) receives an 
order permitting the adviser to register with the Commission. 
Although the statutory threshold is $100 million, the SEC raised the 
threshold to $110 million to provide a buffer for mid-sized advisers 
with assets under management close to $100 million to determine 
whether and when to switch between state and Commission 
registration. Advisers Act rule 203A-1(a).
    \896\ There are 70 investment advisers with latest reported 
regulatory assets under management in excess of $110 million but 
that are not listed as registered with the SEC. None of these 70 
investment advisers has exempted status with the Commission. For the 
purposes of this rulemaking, these are considered potentially 
erroneous submissions
---------------------------------------------------------------------------

    Approximately 81% of state-registered investment advisers (13,927) 
have some portion of their business dedicated to retail investors,\897\ 
and in aggregate, these firms have approximately $324 billion in 
AUM.\898\ Approximately 13,910 (81%) state-registered advisers serve 14 
million non-high net worth retail clients and have approximately $137 
billion in AUM, while 11,497 (67%) state-registered advisers serve 
approximately 170,000 high net worth retail clients with approximately 
$169 billion in AUM.\899\
---------------------------------------------------------------------------

    \897\ 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. Part 1A of Form ADV.
    \898\ 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.
    \899\ Estimates are based on IARD system data as of February 10, 
2018. The AUM reported here is specifically that of those non-high 
net worth investors. Of the 13,927 state-registered investment 
advisers serving retail investors, 134 may also be dually registered 
as broker-dealers.
---------------------------------------------------------------------------

    Table 5 details the compensation structures employed by 
approximately 13,000 SEC-registered investment advisers. Approximately 
96% 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, in addition to fee-based compensation, including fixed fees, 
hourly charges, and performance based fees. Less than 4% of investment 
advisers charge commissions \900\ to their investors.
---------------------------------------------------------------------------

    \900\ 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.

      Table 5--Registered Investment Advisers Compensation by Type
------------------------------------------------------------------------
           Compensation type                   Yes              No
------------------------------------------------------------------------
A Percentage of Assets Under Management           12,678             614
Hourly Charges.........................            3,914           9,378
Subscription Fees (For a Newsletter or               122          13,170
 Periodical)...........................
Fixed Fees (Other Than Subscription                5,800           7,492
 Fees).................................
Commissions............................              454          12,838
Performance-Based Fees.................            4,938           8,354
Other..................................            1,899          11,393
------------------------------------------------------------------------

    As discussed above, many investment advisers participate in wrap 
fee programs. As of December 31, 2018, more than 8.5% of the SEC-
registered investment advisers sponsor a wrap fee program and more than 
13.1% act as a portfolio manager for one or more wrap

[[Page 33566]]

fee programs.\901\ 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.
---------------------------------------------------------------------------

    \901\ 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.
---------------------------------------------------------------------------

(1) Disclosures for Investment Advisers
    As discussed more fully in the Fiduciary Release, investment 
advisers have a duty to provide full and fair disclosure of all 
material facts about the advisory relationship to their clients as well 
as to obtain informed consent from their clients. \902\ SEC- and state-
registered investment advisers are also subject to express disclosure 
requirements in Form ADV. 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.\903\ Part 1 of Form ADV provides 
information to regulators about the registrants' ownership, investors, 
and business, and it is made available to clients, prospective clients, 
and the public. 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,\904\ 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.\905\ The Part 2A brochure is the primary 
client-facing disclosure document,\906\ however, Parts 1 and 2A are 
both made publicly available by the Commission through IAPD,\907\ and 
advisers are generally required to deliver Part 2A and Part 2B to their 
clients.
---------------------------------------------------------------------------

    \902\ See Fiduciary Release supra footnote 47.
    \903\ See Advisers Act rules 203-1 and 204-1. Part 1 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 footnote 576.
    \904\ Part 2A of Form ADV contains 18 mandatory disclosure items 
about the advisory firm, including information about an adviser's: 
(i) Range of fees; (ii) methods of analysis; (iii) investment 
strategies and risk of loss; (iv) brokerage, including trade 
aggregation polices and directed brokerage practices, as well as the 
use of soft dollars; (v) review of accounts; (vi) client referrals 
and other compensation; (vii) disciplinary history; and (viii) 
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 footnote 576.
    \905\ 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 General Instruction 5 to Form ADV. 
Registrants are not required to file Part 2B (brochure supplement) 
electronically, but must preserve a copy of the supplement(s) and 
make the copy available upon request.
    \906\ See Brochure Adopting Release, supra footnote 576.
    \907\ See Investment Adviser Public Disclosure, available at 
https://adviserinfo.sec.gov/.
---------------------------------------------------------------------------

c. Trends in the Relative Numbers of Providers of Financial Services
    Over time, the relative number of broker-dealers and investment 
advisers has changed. Figure 1 presented below shows the time series 
trend of growth in broker-dealers and SEC-registered investment 
advisers between 2005 and 2018. Over the last 14 years, the number of 
broker-dealers has declined from over 6,000 in 2005 to less than 4,000 
in 2018, while the number of investment advisers has increased from 
approximately 9,000 in 2005 to over 13,000 in 2018. This change in the 
relative numbers of broker-dealers and investment advisers over time 
likely affects the competition for advice, and potentially alters the 
choices available to retail investors regarding how to receive or pay 
for such advice, the nature of the advice, and the attendant conflicts 
of interest.
BILLING CODE 8011-01-P

[[Page 33567]]

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[[Page 33568]]


    An increase in the number of investment advisers and a decrease 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,\908\ 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. 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 that provide a steady 
source of revenue rather than accounts that charge commissions and are 
dependent on transactions.\909\ Broker-dealers have indicated that the 
following factors have contributed to this migration: Provision of 
revenue stability or increase in profitability,\910\ perceived lower 
regulatory burden, and provisions of more services to retail 
customers.\911\
---------------------------------------------------------------------------

    \908\ See Hester Peirce, Dwindling Numbers in the Financial 
Industry, Brookings Center on Markets and Regulation Report (May 15, 
2017), at 5, 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. 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, National Futures Association, or the 
MSRB.
    \909\ See id. at 7. Beyond Commission observations, the 
Brookings Report also discusses the shift from broker-dealer to 
investment advisory business models for retail investors. Declining 
transaction-based revenue due to declining commission rates and 
competition from discount brokerage firms has made fee-based 
products and services more attractive to providers of such products 
and services. Although discount brokerage firms generally provide 
execution-only services and do not compete directly in the advice 
market with full service broker-dealers and investment advisers, 
entry by discount brokers has contributed to lower commission rates 
throughout the broker-dealer industry. Further, fee-based activity 
generates a steady stream of revenue regardless of the customer 
trading activity, unlike commission-based accounts; see also Angela 
A. Hung, et al., Investor and Industry Perspectives on Investment 
Advisers and Broker-Dealers, RAND Institute for Civil Justice 
Technical Report (2008), available at https://www.rand.org/content/dam/rand/pubs/technical_reports/2008/RAND_TR556.pdf (``RAND 2008''), 
which discusses a shift from transaction-based to fee-based 
brokerage accounts prior to recent regulatory changes.
    \910\ 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., The Jones Financial Companies, L.L.L.P., Form 10-K (Mar. 14, 
2019), available at https://www.sec.gov/Archives/edgar/data/815917/000156459019007788/ck0000815917-10k_20181231.htm; Raymond James 
Financial, Inc., Form 10-K (Nov. 21, 2018), available at https://www.sec.gov/Archives/edgar/data/720005/000072000518000083/rjf-20180930x10k.htm; Stifle Financial Corp., Form 10-K (Feb. 20, 2019), 
available at https://www.sec.gov/Archives/edgar/data/720672/000156459019003474/sf-10k_20181231.htm; Wells Fargo & Co., 10-K 
(Feb. 27, 2019) available at https://www.sec.gov/Archives/edgar/data/72971/000007297119000227/wfc-12312018x10k.htm; and Ameriprise 
Financial Inc., Form 10-K (Feb. 23, 2018), available at https://www.sec.gov/Archives/edgar/data/820027/000082002718000008/amp12312017.htm. 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 Hugh Son, 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 Lisa Beilfuss & 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/.
    \911\ See Regulation Best Interest Release, supra footnote 47, 
at Section III.B.2.e.ii, which discusses industry trends.
---------------------------------------------------------------------------

    Further, there has been a substantial increase in the number of 
retail clients of 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-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.

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[[Page 33570]]


BILLING CODE 8011-01-C
d. 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 SRO (``registered 
representatives'').\912\ 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.\913\
---------------------------------------------------------------------------

    \912\ 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, 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.
    \913\ See 17 CFR 275.203A-3. However, the data on numbers of 
registered IARs may undercount the number of supervised persons of 
investment advisers who provide investment advice to retail 
investors because not all supervised persons who provide investment 
advice to retail investors are required to register as IARs. For 
example, Commission rules exempt from IAR registration supervised 
persons who provide advice only to non-individual clients or to 
individuals that meet the definition of ``qualified client.'' In 
addition, state securities authorities may impose different criteria 
for requiring registration as an investment adviser representative.
---------------------------------------------------------------------------

    We estimate the number of registered representatives and registered 
IARs, including dually registered financial professionals, (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.\914\ We only consider employees at firms who have 
retail-facing business, as defined previously.\915\ We observe in Table 
6 that approximately 60% of registered financial professionals are 
employed by dually registered entities. The percentage varies by the 
size of the firm. For example, in firms with total assets between $1 
billion and $50 billion, 67% of all registered financial professionals 
are employed by dually registered firms. Focusing on dually registered 
firms only, approximately 62.7% of total licensed representatives at 
these firms are dually registered financial professionals, 
approximately 36.9% are only registered representatives; and less than 
one percent are only registered investment adviser representatives.
---------------------------------------------------------------------------

    \914\ We calculate these numbers based on Form U4 filings. 
Representatives of broker-dealers, investment advisers, and issuers 
of securities must file this form when applying to become registered 
in appropriate jurisdictions and with SROs. Firms and 
representatives have an obligation to amend and update information 
as changes occur. Using the examination information contained in the 
form, we consider an employee a 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 for an RR or IAR.
    \915\ See supra footnotes 864 and 893.

           Table 6--Total Registered Representatives at Broker-Dealers, Investment Advisers, and Dually Registered Firms With Retail Investors
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         % of reps. in   % of reps. in   % of reps. in                      % reps. in
   Size of firm (total assets for standalone BDs and     Total number       dually       standalone BD  standalone BD w/  % of reps. in    standalone IA
   dually registered firms; AUM for standalone IAs)        of reps.       registered        w/an IA         o an IA      standalone IA w/    w/o a BD
                                                                             firms         affiliate       affiliate      a BD affiliate     affiliate
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$50 billion..........................................          84,461              73               7                0               19               1
$1 billion to $50 billion.............................         170,256              67              11                0               15               7
$500 million to $1 billion............................          29,874              71               5                1                7              16
$100 million to $500 million..........................          66,924              51              27                0                4              18
$10 million to $100 million...........................         106,178              55              42                1                1               1
$1 million to $10 million.............................          33,790              35              54               11                0               0
<$1 million...........................................          12,522               8              52               36                3               1
                                                       -------------------------------------------------------------------------------------------------
    Total Licensed Representatives \916\..............         504,005              60              23                2                9               6
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In Table 7 below, we estimate the number of employees who are 
registered representatives, registered investment adviser 
representatives, or both (``dually registered representatives'').\917\ 
Similar to Table 6, 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.\918\
---------------------------------------------------------------------------

    \916\ 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.
    \917\ We calculate these numbers based on Form U4 filings.
    \918\ See supra footnotes 864 and 893.
---------------------------------------------------------------------------

    In Table 7, approximately 25% of registered employees at registered 
broker-dealers or investment advisers are dually registered 
representatives. However, this proportion varies significantly across 
size categories. For example, for firms with total assets between $1 
billion and $50 billion,\919\ approximately 35% of all registered 
employees are both registered representatives and investment adviser

[[Page 33571]]

representatives. In contrast, for firms with total assets below $1 
million, 13% of all employees are dually registered representatives.
---------------------------------------------------------------------------

    \919\ Firm size is defined as total assets from the balance 
sheet for broker-dealers and dually registered firms (source: FOCUS 
reports) and as assets under management for investment advisers 
(source: Form ADV). We are unable to obtain customer assets for 
broker-dealers, and for investment advisers. We can only obtain 
information from Form ADV as to whether the firm assets exceed $1 
billion. We recognize that our approach of using firm assets for 
broker-dealers and customer assets for investment advisers does not 
allow for direct comparison; however, our objective is to provide 
measures of firm size and not to make comparisons between broker-
dealers and investment advisers based on firm size. Across both 
broker-dealers and investment advisers, larger firms, regardless of 
whether we stratify on firm total assets or assets under management, 
have more customer accounts, are more likely to be dually 
registered, and have more representatives or employees per firm, 
than smaller broker-dealers or investment advisers.

        Table 7--Employees at Retail Facing Firms Who Are Registered Representatives, Investment Adviser
                                            Representatives, or Both
----------------------------------------------------------------------------------------------------------------
                                                                 Percentage of    Percentage of
 Size of firm (total assets for standalone BDs   Total number        dually         registered    Percentages of
     and dually registered firms; AUM for        of employees      registered    representatives     IARs only
                standalone IAs)                                 representatives        only
----------------------------------------------------------------------------------------------------------------
>$50 billion..................................         218,539               19               16               1
$1 billion to $50 billion.....................         328,842               35               12               4
$500 million to $1 billion....................          43,211               18               40              10
$100 million to $500 million..................         119,214               23               24               9
$10 million to $100 million...................         176,559               20               39               1
$1 million to $10 million.....................          56,230               17               39               1
<$1 million...................................          18,334               13               46               3
                                               -----------------------------------------------------------------
    Total Employees at Retail Facing Firms             960,929               25               23               4
     \920\....................................
----------------------------------------------------------------------------------------------------------------

    Approximately 87% 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,\921\ 87.6% of 
registered investment adviser representatives were dually registered as 
registered representatives as of mid-October 2010.\922\ In contrast, 
approximately 52% of registered representatives were dually registered 
as investment adviser representatives at the end of 2018.\923\
---------------------------------------------------------------------------

    \920\ See supra footnotes 918 and 919. Note that all percentages 
in the table have been rounded to the nearest whole percentage 
point.
    \921\ See Staff of the 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), available at www.sec.gov/news/studies/2011/913studyfinal.pdf (``913 Study'').
    \922\ 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.
    \923\ 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 firms 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.
---------------------------------------------------------------------------

    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 \924\ and U5 
\925\ for their representatives. SROs, regulators and jurisdictions 
report disclosure events on Form U6.\926\ FINRA's BrokerCheck system 
and IAPD discloses to the public certain information on registered 
representatives and investment adviser representatives, respectively, 
such as principal place of business, business activities, owners, and 
criminal prosecutions, regulatory actions, and civil actions in 
connection with any investment-related activity.
---------------------------------------------------------------------------

    \924\ 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.
    \925\ Form U5 requires information about representatives' 
termination from their employers.
    \926\ See FINRA, Current Uniform Registration Forms for 
Electronic Filing in Web CRD[supreg], available at https://www.finra.org/industry/web-crd/current-uniform-registration-forms-electronic-filing-web-crd.
---------------------------------------------------------------------------

e. 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. The OIAD/RAND survey estimates that approximately 73% of 
adults live in a household that invests.\927\ The survey indicates that 
non-investors are more likely to be female, to have lower family income 
and educational attainment, and to be younger than investors.\928\ 
Approximately 35% of households that do invest do so through accounts 
such as broker-dealer or advisory accounts.\929\
---------------------------------------------------------------------------

    \927\ See OIAD/RAND, supra footnote 3 (defining ``investors'' as 
persons ``owning at least one type of investment account, (e.g., an 
employer-sponsored retirement account, a non-employer sponsored 
retirement account such as an IRA, a college savings investment 
account, or some other type of investment account such as a 
brokerage or advisory account), or owning at least one type of 
investment asset (e.g., mutual funds, exchange-traded funds or other 
funds, individual stocks, individual bonds, derivatives, and 
annuities)'').
    \928\ OIAD/RAND, supra footnote 3.
    \929\ Id..
---------------------------------------------------------------------------

    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. According to the 
Investment Company Institute (``ICI''), as of December 2016, nearly 
$24.2 trillion is invested in retirement accounts, of which $7.5 
trillion is in IRAs.\930\ 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).\931\ With respect to IRA accounts, one commenter, 
the ICI, documents that 43 million U.S. households own either 
traditional or Roth IRAs and that approximately 70% are held with 
financial professionals, with the remainder being direct market.\932\

[[Page 33572]]

Further, ICI finds that approximately 64% of households have aggregate 
IRA (traditional and Roth) balances of less than $100,000, and 
approximately 36% of investors have balances below $25,000. As noted in 
one study, the growth of assets in traditional IRAs comes from 
rollovers from workplace retirement plans; for example, 58% of 
traditional IRAs consist of rollover assets, and contributions due to 
rollovers exceeded $460 billion in 2015 (the most recently available 
data).\933\
---------------------------------------------------------------------------

    \930\ See Sarah Holden & Daniel Schrass, The Role of IRAs in US 
Households' Saving for Retirement, 2016, 23 ICI Res. Persp. 23-1 
(Jan. 2017), available at https://www.ici.org/pdf/per23-01.pdf.
    \931\ 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 
account. See Board of Governors of the Federal Reserve System, 
Survey of Consumer Finances (2016), available at https://www.federalreserve.gov/econres/scfindex.htm. The SCF 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.
    \932\ See Sarah Holden & Daniel Schrass, The Role of IRAs in 
U.S. Households' Saving for Retirement, 2018, ICI Res. Persp. 24-10 
(Dec. 2018), available at https://www.ici.org/pdf/per24-10.pdf.
    \933\ See id.
---------------------------------------------------------------------------

    While the number of retail investors obtaining services from 
investment advisers and the aggregate value of associated assets under 
management has increased, the OIAD/RAND study also suggests that the 
general willingness of investors to use planning or to take financial 
advice regarding strategies, products, or accounts is relatively fixed 
over time.\934\ With respect to the account assets associated with 
retail investors, the OIAD/RAND survey also estimates that 
approximately 10% of investors who have broker-dealer or advisory 
accounts hold more than $500,000 in assets, while approximately 47% 
hold $50,000 in assets or less. Altogether, many investors who have 
brokerage or advisory accounts trade infrequently, with approximately 
31% reporting no annual transactions and an additional approximately 
30% reporting three or fewer transactions per year.\935\
---------------------------------------------------------------------------

    \934\ OIAD/RAND, supra footnote 3 (noting that this conclusion 
was limited by the methodology of comparing participants in a 2007 
survey with those surveyed in 2018).
    \935\ OIAD/RAND, supra footnote 3.
---------------------------------------------------------------------------

    With respect to particular products, commenters have provided us 
with additional information about ownership of mutual funds and IRA 
account statistics. For example, ICI stated that 56 million U.S. 
households and nearly 100 million individual investors own mutual 
funds, of which 80% are held through 401(k) and other workplace 
retirement plans, while 63% of investors hold mutual funds outside of 
those plans.\936\ Of those investors that own mutual funds outside of 
workplace retirement plans, approximately 50% rely on financial 
professionals, while nearly one-third purchase direct-sold funds either 
directly from the fund company or through a discount broker.\937\
---------------------------------------------------------------------------

    \936\ See ICI Letter; see also Sarah Holden, Daniel Schrass & 
Michael Bogdan, Ownership of Mutual Funds, Shareholder Sentiment, 
and Use of the internet, 2018, ICI Res. Persp. 24-8 (Nov. 2018), 
available at https://www.ici.org/pdf/per24-08.pdf.
    \937\ See id.
---------------------------------------------------------------------------

    Table 8 below provides an overview of account ownership segmented 
by account type (e.g., IRA, brokerage, or both) and investor income 
category based on the SCF.\938\
---------------------------------------------------------------------------

    \938\ 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 rulemaking.

                         Table 8--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.             5.4
50%-75%.........................................................             4.1            21.4            11.4
75%-90%.........................................................             7.5            33.4            16.5
Top 10%.........................................................            12.0            24.7            43.9
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Average.....................................................             4.4            18.3            11.6
----------------------------------------------------------------------------------------------------------------

    With respect to the nature of the accounts held by investors and 
whether they are managed by financial professionals, the OIAD/RAND 
survey finds that 36% of its sample of participants report that they 
currently use a financial professional and approximately 33% receive 
some kind of recommendation service.\939\ Of the subset of those 
investors who report holding a brokerage, advisory, or similar account, 
approximately 33% self-direct their own account, 25% have their account 
managed by a financial professional, and 10% have their account advised 
by a professional.\940\ For those investors who take financial advice, 
the OIAD/RAND study suggests that they may differ in characteristics 
from other investors. Investors who take financial advice are generally 
older, retired, and have a higher income than other investors, but also 
may have lower educational attainment (e.g., high school or less) than 
other investors.\941\
---------------------------------------------------------------------------

    \939\ OIAD/RAND, supra footnote 3. In a focus group preceding 
the survey, focus group participants provided a number of reasons 
for not using a financial professional in making investments, 
including being unable or unwilling to pay the fees, doing their own 
financial research, being unsure of how to work with a professional, 
and being concerned about professionals selling products without 
attending to investors' plans and goals.
    \940\ Id.
    \941\ Id.
---------------------------------------------------------------------------

    Similarly, 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.\942\ Panel A of Table 8 below presents the 
breakdown of where households who have brokerage accounts seek advice 
about savings and investments. The table shows that of those 
respondents with brokerage accounts, 23% (4.7 million households) use 
advice services of broker-dealers for savings and investment decisions, 
while 49% (7.8 million households) take advice from a ``financial 
planner.'' Approximately 36% (7.2 million households) seek advice from 
other sources such as bankers, accountants, and lawyers. Almost 25% 
(5.0 million households) do not use advice from the above sources.
---------------------------------------------------------------------------

    \942\ The SCF, supra footnote 931, specifically asks 
participants ``Do you get advice from a friend, relative, lawyer, 
accountant, banker, broker, or financial planner? Or do you do 
something else?'' (see Federal Reserve, Codebook for 2016 Survey of 
Consumer Finances (2016), available at https://www.federalreserve.gov/econres/files/codebk2016.txt). Other response 
choices presented by the survey include ``Calling Around,'' 
``Magazines,'' ``Self,'' ``Past Experience,'' ``Telemarketer,'' and 
``Insurance Agent,'' as well as 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 does not 
specifically include ``investment adviser.''
---------------------------------------------------------------------------

    Panel B of Table 9 below presents the breakdown of advice received 
for

[[Page 33573]]

households who have an IRA. 15% (5.7 million households) rely on advice 
services of their broker-dealers and 48% (18.3 million households) 
obtain advice from financial planners. Approximately 41% (15.5 million 
households) seek advice from bankers, accountants, or lawyers, while 
the 25% (9.5 million households) use no advice or seek advice from 
other sources.

   Table 9--Panel A: Sources of Advice for Households Who Have a Brokerage Account in the U.S. by Income Group
                                                      \943\
----------------------------------------------------------------------------------------------------------------
                                                                                     % Taking
                                                     % Taking        % Taking       advice from     % Taking no
                 Income category                    advice from     advice from      lawyers,     advice or from
                                                      brokers        financial      bankers, or    other sources
                                                                     planners       accountants
----------------------------------------------------------------------------------------------------------------
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
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Average.....................................           23.02           49.02           35.99           24.94
----------------------------------------------------------------------------------------------------------------


      Table 9--Panel B: Sources of Advice for Households Who Have an IRA in the U.S. by Income Group \944\
----------------------------------------------------------------------------------------------------------------
                                                                                     % Taking
                                                     % Taking        % Taking       advice from     % Taking no
                 Income category                    advice from     advice from      bankers,     advice or from
                                                      brokers        financial     accountants,    other sources
                                                                     planners       or lawyers
----------------------------------------------------------------------------------------------------------------
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
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Average.....................................           15.25           48.45           41.17           25.28
----------------------------------------------------------------------------------------------------------------

    The OIAD/RAND survey notes that for survey participants who 
reported working with a specific individual for investment advice, 70% 
work with a dually registered firm, 5.4% with a broker-dealer, and 5.1% 
with an investment adviser.\945\
---------------------------------------------------------------------------

    \943\Id.
    \944\Id.
    \945\ OIAD/RAND, supra footnote 3. As documented by OIAD/RAND, 
retail investors surveyed had difficulty in accurately identifying 
the type of relationship that they have with their financial 
professional.
---------------------------------------------------------------------------

2. Investor Perceptions About the Marketplace for Financial Services 
and Disclosures
    Our proposal discussed a number of studies providing information on 
investors' perceptions of the market for financial services and advice, 
including those conducted by Siegel & Gale \946\ in 2005, RAND \947\ in 
2008 and CFA in 2010.\948\ Commenters to the proposal provided their 
own studies or survey evidence conducted by third party research firms, 
which we have discussed throughout the release.\949\ In addition, the 
Commission's Office of the Investor Advocate collaborated with RAND to 
prepare the OIAD/RAND study,\950\ which included focus groups and a 
survey about the retail market for investor advice. The Commission's 
Office of the Investor Advocate also engaged RAND to conduct investor 
testing of the proposed relationship summary using the dual registrant 
sample in the proposal. The report, RAND 2018,\951\ discusses both 
larger sample survey results and smaller sample in-depth interview 
results. Finally, the proposal solicited public feedback from 
individual investors on a feedback form issued with the Proposing 
Release.\952\ Responses and data from these sources inform our 
understanding of how investors approach the marketplace for financial 
services and how investors respond to disclosures about financial 
services generally.
---------------------------------------------------------------------------

    \946\ Proposing Release, supra footnote 5, at n.555.
    \947\ Id., at n.556.
    \948\ Id., at n.557.
    \949\ See supra footnotes 17-21.
    \950\ OIAD/RAND consisted of focus group discussions with 35 
participants in total. OIAD/RAND caveats in its report that the 
participants in its focus groups were neither nationally 
representative nor randomly selected and that their results are 
anecdotal. OIAD/RAND also included a nationally representative 
probability based survey to allow researchers to reliably construct 
population estimates. OIAD/RAND, supra footnote 3.
    \951\ For RAND 2018, a sample of 1,816 individuals from the ALP 
Survey Panel were invited to complete the survey, and 1,460 (80.4%) 
actually completed the survey. 26% of respondents are categorized as 
non-investor. Median time spent going through the initial five 
screens of the relationship summary text was 4 minutes. RAND 2018, 
supra footnote 13.
    \952\ Proposing Release, supra footnote 5; see also Feedback 
Forms Comment Summary, supra footnote 13. More than 90 individuals 
answered with a response or comment relevant to at least one of the 
questions on the form, using an online version of the feedback form 
or by submitting a copy of the feedback form to the comment file in 
PDF format.
---------------------------------------------------------------------------

a. 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.\953\ For instance, the 
RAND 2008 study reported that 46% of survey respondents indicated that 
they located a financial professional from personal referral, although 
this percentage varied

[[Page 33574]]

depending on the type of service provided (e.g., only 35% of survey 
participants used personal referrals for brokerage services). After 
personal referrals, RAND 2008 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 2008 study 
separately inquired about locating a financial firm,\954\ in which 
respondents reported selecting a 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%).
---------------------------------------------------------------------------

    \953\ See RAND 2008, supra footnote 912; 917 Financial Literacy 
Study, supra footnote 589.
    \954\ 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.\955\ In the 917 
Financial Literacy Study,\956\ 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.
---------------------------------------------------------------------------

    \955\ See 917 Financial Literacy Study, supra footnote 589.
    \956\ 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.
---------------------------------------------------------------------------

    The OIAD/RAND focus group study notes that among the factors that 
group participants report for not working with a financial professional 
was participants being unsure how they would go about working with a 
professional.\957\
---------------------------------------------------------------------------

    \957\ OIAD/RAND, supra footnote 3.
---------------------------------------------------------------------------

b. Investor Confusion
    As discussed in the Proposing Release and by commenters to the 
proposal, many sources indicate that retail investors do not understand 
or find confusing the distinctions between broker-dealers and 
investment advisers, particularly in terms of services provided and 
applicable standards of conduct.\958\
---------------------------------------------------------------------------

    \958\ See generally supra Section II.B.2 (discussing benefits of 
including disclosure on individualized firm services); Section 
II.B.6 (discussing removal of generalized comparisons between 
advisers and broker-dealers); see also Proposing Release, supra 
footnote 5 (discussing commenters in response to Chairman Clayton's 
2017 request for comment and commenters to the 913 Study).
---------------------------------------------------------------------------

    Studies such as those conducted by Siegel & Gale \959\ in 2005, 
RAND \960\ in 2008, and CFA in 2010,\961\ discussed in the Proposing 
Release, support findings that retail investors are confused about the 
roles and titles of financial professionals. The OIAD/RAND study 
assessed survey and focus group participants' understanding of the 
types of financial services and financial professionals they used.\962\ 
Specifically, the authors of the OIAD/RAND study asked survey 
participants who were investors to identify which type of financial 
professional they worked with (investment adviser, broker-dealer, or 
dually-registered firm). The authors compared the types of financial 
professionals reported by the survey participants with the actual 
status of those financial professionals as verified on the IAPD 
database, and found that the verified types of financial professionals 
in many cases did not match the types of financial professionals that 
were reported by the survey participants.\963\ For example, when 
financial professionals were verified to be dually registered, only 34% 
were reported by survey participants to be dually registered (and 56% 
were reported to be only investment advisers). In addition to the 
survey, the OIAD/RAND authors also asked a small focus group of 
participants that used financial professionals to identify which type 
of professional they were using, which was then verified by IAPD. Only 
one of the twelve participants was able to identify the correct type of 
financial professional unambiguously (although it was not clear if 
clients of verified dually-registered firms were only utilizing one 
type of that professional's services). The study authors concluded that 
this showed low awareness of the classification of investment advisers 
and broker-dealers.
---------------------------------------------------------------------------

    \959\ Proposing Release, supra footnote 5, at Section IV.A.3.h. 
(stating that 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' roles and legal 
obligations, 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); see also id., at n.5.
    \960\ Similarly, the RAND 2008 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. RAND 2008, supra footnote 909.
    \961\ Infogroup/ORC, U.S. Investors & The Fiduciary Standard, 
National Opinion Survey (Sept. 15, 2010), available at https://www.cfp.net/docs/public-policy/us_investors_opinion_survey_2010-09-16.pdf (``CFA Survey''). The CFA Survey suggested that respondents 
were confused about differences between broker-dealers and 
investment advisers as described by the study's authors to the 
respondents.
    \962\ OIAD/RAND, supra footnote 3.
    \963\ OIAD/RAND, supra footnote 3. Note that the authors 
caveated that it was unclear if survey participants who were 
customers of verified dually registered firms had misidentified the 
type of financial professional because they only received one type 
of service (brokerage or advisory) from the dually registered firm.
---------------------------------------------------------------------------

    Further, the OIAD/RAND survey asked all survey recipients whether 
they could identify the type of financial professional that would 
typically exhibit certain business practices (such as executing 
transactions or being paid by commission), and concluded that at least 
a significant minority of participants could not do so for any of the 
typical practices. Between 13% and 21% of survey participants 
incorrectly answered ``none of the above'' for each of the business 
practices offered by the survey, although those practices were aligned 
with either investment advisers or broker-dealers in the marketplace. 
Moreover, only 36% of participants were able to identify that 
investment advisers were typically paid by a percentage of assets, 
whereas 43% of participants thought that practice was typical of 
broker-dealers. Twenty-six percent of participants incorrectly 
indicated that investment advisers execute transactions for 
clients.\964\ In

[[Page 33575]]

all, the study authors concluded that the survey participants' 
knowledge of the marketplace for financial professionals appeared to be 
incomplete.
---------------------------------------------------------------------------

    \964\ OIAD/RAND, supra footnote 3. The study authors also 
concluded that ``an investor who works with an investment adviser 
because he or she is unaware that broker-dealers can execute 
transactions, and who seeks a professional solely to execute 
transactions on their behalf, might not necessarily be matched with 
the most appropriate professional.''
---------------------------------------------------------------------------

    The OIAD/RAND study authors draw further conclusions from their 
focus group study, where after being offered explanations of the 
differences between investment advisers and broker-dealers, some focus 
group participants continued not to be able to understand the 
distinctions between the two types of professionals. For the OIAD/RAND 
study authors, the focus group exercise underscored the difficulty of 
the topic for some investors.
    Investors are also confused about financial professionals' 
standards of conduct and legal obligations. As discussed in the 
Proposing Release, the Siegel & Gale and RAND 2008 studies found that 
focus group participants generally did not understand legal terms, such 
as ``fiduciary'' or ``best interest.'' \965\ In addition, the RAND 2008 
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.\966\
---------------------------------------------------------------------------

    \965\ Proposing Release, supra footnote 5.
    \966\ RAND 2008, supra footnote 909.
---------------------------------------------------------------------------

    Similarly, many survey respondents in the OIAD/RAND study had 
difficulty understanding the basic relational aspects of financial 
advice and the responsibility for taking risk in any form.\967\ Thirty 
percent of survey respondents believed that financial professionals 
would get paid only if an investor made money on an investment, and 
another quarter of respondents indicated that they did not know if 
financial professionals would get paid only if an investor made money 
on an investment.\968\ A majority of survey respondents expected that a 
financial professional acting in the client's best interest would 
monitor the account, help the client choose the lowest cost products, 
disclose payments they receive, and avoid taking higher compensation 
for selling one product over another when a similar but less costly 
product is available.\969\ OIAD/RAND focus group discussions about the 
distinctions between investment advisers and broker-dealers also 
suggested that some focus group participants were not able to 
distinguish investment advisers from broker-dealers. The study's 
authors concluded that comments of those focus group participants also 
suggest that some individuals might value having a clear distinction 
between professionals who do act in the client's best interest and 
professionals who do not act in the client's best interest.\970\ 
Similarly, in RAND 2018 and in interview-based studies submitted by a 
group of commenters that test the proposed sample dual-registrant 
relationship summary, it was observed that investors could have 
difficulty understanding distinctions between the standard of conduct 
applicable to broker-dealers and investment advisers.\971\
---------------------------------------------------------------------------

    \967\ OIAD/RAND, supra footnote 3.
    \968\ OIAD/RAND, supra footnote 3.
    \969\ OIAD/RAND, supra footnote 3.
    \970\ OIAD/RAND, supra footnote 3.
    \971\ See supra Section II.B.3.b at footnotes 470-479 and 
accompanying text.
---------------------------------------------------------------------------

    With respect to investor perceptions of financial advisers' fees 
and potential conflicts of interest, the OIAD/RAND study revealed that 
``some participants seemed unconcerned with conflicts or took it as a 
good sign if their professional had not disclosed a conflict to them . 
. . In all three groups that had experience using a financial 
professional . . . participants reported that their professional had 
not disclosed any conflicts.'' \972\ The OIAD/RAND study also found 
that almost a half of the investors who received investment advice in 
the study believed that their investment professional receives 
commissions. About a third believed the provider received payments from 
product companies (e.g., mutual funds); another 20% of participants 
believed the provider received a bonus. Altogether, more than half of 
the participants believed the provider received some sort of 
compensation whether through commission, bonus or product payment.\973\ 
The study concluded that ``awareness of the nature of provider payments 
could help investors to recognize conflicts of interest . . .'' and 
thus it could potentially improve investors' decision making. Potential 
investor recognition of the importance of the conflicts of interest is 
reflected in that 51% of the OIAD/RAND study respondents said that it 
was important or extremely important that the financial professional 
receive all compensation from the customer, and only 15% reported that 
it was not important at all.\974\
---------------------------------------------------------------------------

    \972\ OIAD/RAND, supra footnote 3.
    \973\ OIAD/RAND, supra footnote 3.
    \974\ OIAD/RAND, supra footnote 3.
---------------------------------------------------------------------------

    With respect to investor trust, one commenter discussed the results 
of an online survey it had initiated that found that 96% of survey 
respondents mostly or completely trusted their financial 
professional.\975\ The vast majority of survey respondents (97%) also 
believed that their financial professional always or mostly has their 
investors' best interest in mind.\976\
---------------------------------------------------------------------------

    \975\ CCMC Letter (investor polling), supra footnote 21.
    \976\ Id.
---------------------------------------------------------------------------

3. Investor Responses to Disclosures About Financial Professionals and 
Firms
a. Retail Investors and Financial Disclosures Generally
    Commenters provided conclusions based on studies of potential 
limitations to the efficacy of financial disclosures, as discussed 
below.\977\ With respect to the particular areas of disclosure that 
retail investors find helpful, commenters provided us with information 
about the usefulness of such disclosures to retail investors from 
surveys or assessments. We generally note that the RAND 2018 survey and 
other surveys that were provided by commenters gathered participants' 
subjective views and were not designed to objectively assess whether 
any sample disclosures improved participant comprehension.\978\ 
However, the RAND 2018 qualitative interviews included some general 
questions to participants about comprehension and helpfulness of the 
sample proposed relationship summary, which provided some insight into 
participants' understanding of concepts introduced, as did another 
survey and two interview-based studies with respect to sample 
relationship summaries.\979\ Further, the RAND 2018 report and surveys 
and studies submitted by commenters reported that their participants 
subjectively thought that they were informed from the sample 
disclosures that they were provided. The RAND 2018 study authors found 
that nearly 90% of respondents stated that the sample proposed 
relationship summary that they reviewed would help them make informed 
decisions about investment accounts and services.\980\ Likewise, the 
RAND 2018 study authors also observed that interview participants 
demonstrated that they learned new information from the proposed 
relationship summary that they were provided. However, there was 
variation in understanding among participants and the interviews also 
revealed areas of

[[Page 33576]]

confusion.\981\ Similarly, the Woelfel survey authors noted that after 
survey respondents were given time to read a sample proposed dual 
registrant relationship summary, the majority, regardless of their 
current investments or relationship with an investment adviser or 
broker-dealer, believed that they knew a ``little more'' about 
investment advisers and broker-dealers.\982\
---------------------------------------------------------------------------

    \977\ See infra Section IV.C for a discussion of this research.
    \978\ See generally supra footnote 14.
    \979\ See supra footnotes 14 and 20 and accompanying text.
    \980\ See RAND 2018, supra footnote 13.
    \981\ Id.
    \982\ See Cetera Letter II (Woelfel), supra footnote 17.
---------------------------------------------------------------------------

    Several commenters suggest that generally not all investors fully 
read or are able to digest information from disclosures about financial 
professionals. One commenter reports that almost half of its survey 
participants said they selectively skim the disclosures and eight 
percent said they rarely or do not ever read them.\983\ Along similar 
lines, commenters pointed to observations that investors may be 
overconfident in their ability to read and understand disclosures and 
that investors are unable to understand disclosures relating to 
compensation arrangements and conflicts of interest.\984\ Similarly, 
the RAND 2008 study highlighted that participants' confusion about 
titles, services, legal obligations, and compensation persisted even 
after a fact sheet on broker-dealers and investment advisers was 
provided to participants.\985\
---------------------------------------------------------------------------

    \983\ Schwab Letter I (Koski), supra footnote 21.
    \984\ See, e.g., AARP Letter. See also Better Markets Letter, 
CFA Letter I; Consumers Union Letter.
    \985\ See RAND 2008, supra footnote 909. The fact sheet provided 
to RAND 2008 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 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.
---------------------------------------------------------------------------

    With respect to what type of disclosures from firms or financial 
professionals retail investors find helpful, commenters provided two 
surveys of retail investors' general views of disclosures about 
financial professionals in response to the Proposing Release.\986\ One 
commenter reported results from an online survey that provides support 
for the idea that retail investors value at least some disclosures from 
financial professionals. From the a survey of 801 individuals, a 
majority of the survey participants (62%) said they would be interested 
in reading a hypothetical standardized document provided to all new 
clients that explained the relationship between a financial 
professional and clients and thought that such a document would ``boost 
transparency and help build stronger relationships between me and my 
financial professional'' (72%).\987\ Separately, with respect to what 
aspects of financial disclosures retail investors might find most 
helpful, Koski Research conducted an investor survey on behalf of 
another commenter and reported that the ``majority of retail investors 
want communications that are relevant to them (91%), short and to the 
point (85%), and visually appealing (79%).'' \988\ The survey also 
reported that the top four things retail investors wanted communicated 
were the costs for advice, description of advice services, the 
obligations of the firm and its representatives, and the conflicts of 
interest.\989\ Additionally, approximately 70% of the participants in 
the 917 Financial Literacy Study indicated that they would read 
disclosures on conflicts of interest if made available.\990\
---------------------------------------------------------------------------

    \986\ See Schwab Letter I (Koski), supra footnote 21 and CCMC 
Letter (investor polling), supra footnote 21.
    \987\ See CCMC Letter (investor polling), supra footnote 21.
    \988\ See Schwab Letter I (Koski), supra footnote 21.
    \989\ Id. For similar evidence, see also CCMC Letter (investor 
polling), supra footnote 21 (reporting that issues that ``matter 
most'' to investors include: ``explaining fees and costs,'' 
explaining conflicts of interest'' and ``explaining own 
compensation'').
    \990\ 917 Financial Literacy Study, supra footnote 588.
---------------------------------------------------------------------------

b. Investor Perceptions About Specific Disclosures Concerning Financial 
Professionals
(1) Conflicts of Interest
    As discussed in the Proposing Release, previous studies have found 
that investors consider conflicts of interest to be an important factor 
in disclosures from firms and financial professionals.\991\ For 
example, in the 917 Financial Literacy Study, 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.\992\ 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 own 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.
---------------------------------------------------------------------------

    \991\ See Proposing Release, supra footnote 5, at Section 
IV.A.3.c.
    \992\ 917 Financial Literacy Study, supra footnote 588.
---------------------------------------------------------------------------

    Among those participants in the 917 Financial Literacy Study who 
indicated that they would read disclosures on conflicts of interest if 
made available, 48% would request additional information from their 
adviser, 41% would increase the monitoring of their adviser, and 33% 
would propose to limit their exposure of specific conflicts. The 
majority of participants (70%) also wanted to see specific examples of 
conflicts and how those related to the investment advice provided.
(2) Fees
    With respect to disclosures about fees, the Proposing Release also 
discussed the 917 Financial Literacy Study as well as the FINRA 
Investor Study \993\ regarding the importance that investors place on 
disclosures about fees and compensation of financial professionals, and 
how those disclosures should be presented.\994\ Similar to the findings 
regarding conflicts of interest, the 917 Financial Literacy Study found 
that a majority participants indicated that disclosure of the fees and 
compensation of investment advisers was an essential element to any 
disclosure.\995\
---------------------------------------------------------------------------

    \993\ FINRA Investor Education Foundation, Investors in the 
United States 2016 (Dec. 2016), available at https://www.usfinancialcapability.org/downloads/NFCS_2015_Inv_Survey_Full_Report.pdf (``FINRA Investor Study'').
    \994\ See Proposing Release, supra footnote 5, at Section 
IV.A.3.c.
    \995\ 917 Financial Literacy Study, supra footnote 588.
---------------------------------------------------------------------------

(3) Disciplinary History
    As discussed in the Proposing Release, survey evidence in the 917 
Financial Literacy Study indicate 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.\996\ Despite this, most

[[Page 33577]]

investors do not actively seek disciplinary information for their 
advisers and broker-dealers. For example, a FINRA survey in 2009, 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.\997\ The FINRA Investor Study 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.\998\
---------------------------------------------------------------------------

    \996\ See 917 Financial Literacy Study, supra footnote 588, 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.'').
    \997\ 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.
    \998\ See FINRA Investor Survey, supra footnote 993.
---------------------------------------------------------------------------

C. Broad Economic Considerations

    We are adopting a requirement for broker-dealers and investment 
advisers and firms that are dually registered to deliver a relationship 
summary to retail investors because, as discussed in the baseline,\999\ 
many retail investors can be confused about their choices in the market 
for brokerage and investment advisory services. To that end, the 
relationship summary is meant to assist retail investors with both the 
process of deciding whether to engage or remain with a particular firm 
or financial professional and whether to establish or maintain an 
investment advisory or brokerage relationship. Specifically, low 
financial literacy, lack of knowledge about the market for financial 
advice, and lack of information about important aspects of the 
relationship between particular firms and their customers or 
clients,\1000\ may harm retail investors by deterring them from seeking 
brokerage or investment advisory services even if they could 
potentially benefit from it,\1001\ or by increasing the risk of a 
mismatch between the investors' preferences and expectations and the 
actual brokerage or advisory services they receive from a firm or 
professional.\1002\ To ameliorate this potential harm, the relationship 
summary is intended to reduce investor confusion and search costs in 
the process of (i) deciding whether to engage a particular firm or 
financial professional, (ii) whether to establish an investment 
advisory or brokerage relationship, and (iii) whether to terminate or 
switch the relationship or specific service provided. The relationship 
summary is expected to provide significant benefit to retail investors 
by focusing their attention on salient features of their potential 
relationship with a particular broker-dealer or investment adviser and 
highlighting the most important elements of this relationship in a 
single, succinct, and easy-to-understand document. The relationship 
summary also allows for comparability among broker-dealers and 
investment advisers by requiring disclosures on the same topics under 
standardized headings in a prescribed order to retail investors.\1003\ 
As we discuss above in Section I, we do not believe that existing 
disclosures provide this level of transparency and comparability across 
investment advisers, broker-dealers, and dual registrants.
---------------------------------------------------------------------------

    \999\ See supra Section IV.B.
    \1000\ Examples of such aspects of the relationship include the 
services and fees of particular firms, and conflicts of interest 
that may arise between particular firms and customers or clients.
    \1001\ The potential loss to investors with low financial 
literacy from not seeking advice is illustrated by, e.g., the study 
by Hans-Martin von Gaudecker, How Does Household Portfolio 
Diversification Vary with Financial Literacy and Financial Advice?, 
70 J. Fin. 489 (2015), which showed that investors with low 
financial literacy that do not seek financial advice on average 
incur significantly larger losses (by more than 50 basis points) 
from underdiversification compared to investors who seek financial 
advice (irrespective of financial literacy) and investors with 
higher financial literacy who do not seek advice.
    \1002\ Studies provide results of investor misunderstanding that 
is consistent with some investors being at risk of entering into a 
mismatched relationship. For example, survey results in OIAD/RAND, 
supra footnote 3 suggest that a non-trivial subset of retail 
investors may misunderstand the type of their financial 
professional, the type of services the professional offers, and how 
the professional is compensated.
    \1003\ See supra discussion in Section II.A.2.
---------------------------------------------------------------------------

    Below, we discuss in more detail the nature of the potential harm 
faced by retail investors from confusion about the market for brokerage 
and investment advisory services. We also discuss considerations 
involved in creating disclosures for retail investors that may reduce 
the potential for investor harm by increasing their knowledge about the 
market for brokerage and investment advisory services and facilitating 
their search for a firm or financial professional.\1004\
---------------------------------------------------------------------------

    \1004\ We are extending our discussion on broad economic 
considerations from the Proposing Release in response to concerns 
about the economic analysis in the Proposing Releases by commenters; 
see, e.g., Letter from Charles Cox, Former SEC Chief Economist, et 
al. (Feb. 6, 2019), available at https://www.sec.gov/comments/s7-07-18/s70718-4895197-177769.pdf. (``Former SEC Senior Economists 
Letter''). The Former SEC Senior Economists Letter raised three main 
concerns about the economic analysis in the proposed Regulation Best 
Interest and the Proposing Release: (1) The discussion of the 
potential problems in the customer-advisor relationship was 
incomplete and identified other features of the market for ongoing 
retail investment advice that might be problematic; (2) there was 
inadequate discussion and analysis of the existing economic 
literature on financial advice; and (3) there were questions of 
whether the disclosure requirements in the proposing release would 
provide meaningful information for customers. These concerns more 
directly focused on the economic analysis of the proposed Regulation 
Best Interest. However, concerns (1) and (3) appear to also apply to 
the economic analysis of the Proposing Release to some extent, and 
we address those concerns in this economic analysis. For instance, 
with respect to (1), this section provides a more in depth 
discussion compared to the Proposing Release of the harm that may 
arise when retail investors lack knowledge or are confused about the 
market for investment advisory and brokerage services, including a 
discussion of why additional disclosure may be useful to investors. 
With respect to (3), the discussion in this section expands on the 
discussion already provided in the Proposing Release on the 
potential limits to the effectiveness of disclosure to address the 
identified investor harm, but also discusses how disclosure should 
be designed to be effective, including how appropriately designed 
disclosures can help overcome some of the identified potential 
limitations of disclosure. The latter discussion provides a 
framework that informs our analysis in Section IV.D of the 
anticipated economic impacts of the relationship summary. In 
addition, the Former SEC Senior Economists Letter stated that ``[w]e 
feel (preliminarily) that the new CRS forms would provide some 
helpful information. But we would far prefer for there to be 
evidence that the intended targets of these disclosures feel the 
same.'' Our discussion takes into account the various investor 
surveys and studies that were conducted after the Proposing Release 
that reported that large majorities of investors believed the 
relationship summary would help them make more informed decisions 
about types of accounts and services. See, e.g., RAND 2018.
---------------------------------------------------------------------------

    Academic studies have documented a multitude of potential benefits 
that accrue to retail investors as a result of seeking investment 
advice, including, but not limited to: Higher household savings rates, 
setting long-term goals and calculating retirement needs, more 
efficient portfolio diversification and asset allocation, increased 
confidence and peace of mind, facilitation of small investor 
participation, improvement in financial situations, and improved tax 
efficiency.\1005\ Further, financial

[[Page 33578]]

professionals may also explain to retail investors the informational 
asymmetries between product providers and their customers. Retail 
investors might not be able to disentangle such information asymmetries 
on their own. Studies also find that low financial literacy is 
negatively associated with the propensity to seek financial 
advice.\1006\ These findings collectively suggest that retail investors 
of low level financial literacy might be harmed because they might be 
less likely to seek financial advice in spite of the potential benefit 
from it.
---------------------------------------------------------------------------

    \1005\ See, e.g., Mitchell Marsden, Catherine Zick, & Robert 
Mayer, The Value of Seeking Financial Advice, 32 J. Fam. & Econ. 
Issues 625 (2011); Jinhee Kim, Jasook Kwon, & Elaine A. Anderson, 
Factors Related to Retirement Confidence: Retirement Preparation and 
Workplace Financial Education, 16 J. Fin. Counseling & Plan. (2005); 
Daniel Bergstresser, John Chalmers & Peter Tufano, Assessing the 
Costs and Benefits of Brokers in the Mutual Fund Industry, 22 Rev. 
Fin. Stud. 4129 (2009); Ralph Bluethgen, Steffen Meyer, & Andreas 
Hackethal, High-Quality Financial Advice Wanted!, Euro. Bus. Sch., 
Working Paper, (Feb. 2008), available at https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.596.2310&rep=rep1&type=pdf; Neal M. Stoughton, 
Youchang Wu, & Josef Zechner, Intermediated Investment Management, 
66 J. Fin. 947 (2011). Francis M. Kinniry, et al., Putting a value 
on your value: Quantifying Vanguard Advisor's Alpha, Vanguard 
Research (Sept. 2016) estimates the value to investors associated 
with obtaining financial advice of approximately 3% in net returns 
to investors, associated with suitable asset allocation, managing 
expense ratios, behavioral coaching, alleviating home bias, among 
others.
    \1006\ For a discussion of the academic research on the role of 
financial literacy in seeking financial advice see, e.g., OIAD/RAND, 
supra footnote 3 at 8.
---------------------------------------------------------------------------

    For a retail investor who decides to enter a relationship with a 
financial services provider, a low level of knowledge about the market 
for financial services might reduce the investor's ability to 
accurately identify whether any given firm or financial professional 
offers a type of relationship that matches his or her preferences and 
expectations. This, in turn, increases the risk that the firm or 
financial professional is a poor match for the retail investor when 
compared to an alternative financial services provider. A relationship 
that represents a poor match between an investor and a firm or 
financial professional can leave an investor worse-off, relative to a 
better match, or no match at all, because the relationship could result 
in a cost of services that is higher than the investor expects or a 
level or type of service that is different than the investor expects, 
such as episodic recommendations versus continuing advice.
    A retail investor might search across a set of financial service 
providers to find a financial professional that best meets his or her 
needs.\1007\ For an investor who is able to acquire information from 
the financial service providers the investor chooses to evaluate, the 
more extensive a search the investor engages in, the more likely the 
investor will locate a good match. However, conducting such a search is 
costly and requires time, effort, and access to resources. Investors 
likely balance the benefits of evaluating each additional provider 
against the incremental cost of doing so, ending their search when the 
expected marginal cost of the search is greater than the expected 
marginal benefit from the search.\1008\ Moreover, some investors may 
experience higher-level of uncertainty about the benefits or costs of a 
search. For example, investors who are less knowledgeable about the 
general differences between different types of financial professionals, 
the services these professionals provide, and the factors they should 
consider in their choice, may not fully appreciate the benefits of 
searching for a provider that best meets their needs. To the extent 
such investors perceive a search as burdensome because they 
underestimate the benefits of searching, they might refrain from 
conducting a search or conduct a less extensive search to learn about 
potential alternatives, thereby increasing their risk of entering a 
relationship with a firm or financial professional that is a poor match 
with their expectations and preferences or not engaging in a 
relationship even if one might be beneficial.\1009\
---------------------------------------------------------------------------

    \1007\ The evidence discussed in supra Section IV.B.2.a on how 
investors select a financial professional or firm suggests that a 
large majority of retail investors rely on personal or professional 
referrals, which may indicate that they evaluate very few, if any 
alternative providers. One potential reason for this reliance on 
referrals could be that investors currently perceive their search 
costs to be high. Another possible reason, among others, could be 
that investors value the information derived from other people's 
experiences more than other sources of information.
    \1008\ This assumes a sequential search process, but an 
analogous argument can be made if an investor instead searches by 
deciding ex ante on a fixed number of alternatives to evaluate, in 
which case the marginal decisions then relates to what this number 
will be. See, e.g., Babur De los Santos, et al., Testing Models of 
Consumer Search Using Data on Web Browsing and Purchasing Behavior, 
102 Am. Econ. Rev. 2955 (2012). We have expanded our discussion on 
search costs in response to main concern (1) of the Former SEC 
Senior Economists Letter; see supra footnote 1004.
    \1009\ This argument assumes that less knowledgeable investors 
can learn at least some information from engaging in an initial 
search or a continued search that could be used to evaluate fit 
(albeit imperfectly so). If less knowledgeable investors cannot 
learn from a search at all, the choice of a firm or financial 
professional becomes similar to a random draw and a search, no 
matter how extensive, will not decrease the risk of a mismatch.
---------------------------------------------------------------------------

    General trust (in the sense of confidence) in financial markets can 
help alleviate certain behavioral biases and encourage participation 
in, for example, the stock market.\1010\ Trust at an interpersonal 
level may be less beneficial in certain circumstances. Research 
suggests that lower financial literacy among investors is positively 
associated with higher personal trust in their financial 
professionals.\1011\ However, to the extent retail investors substitute 
trust for knowledge in their relationship with a financial 
professional, overreliance on trust may induce some investors to 
maintain a mismatched relationship longer than they otherwise would if 
they had higher financial literacy and a better understanding of the 
costs and benefits of the financial advice they receive from the 
professional, as well as awareness of alternative services or 
providers.\1012\ That is, particularly for less-knowledgeable 
investors, a high level of trust in a particular financial professional 
or firm may exacerbate the potential harm of a mismatched relationship. 
Similarly, some retail investors that select a firm or financial 
professional based on referrals from friends and family may do so 
solely on the basis of a high level of trust in these referring 
parties.\1013\ This can exacerbate the potential harm of a mismatched 
relationship in particular for less sophisticated investors and/or for 
investors who relied on referrals from less financially sophisticated 
parties.\1014\
---------------------------------------------------------------------------

    \1010\ See, e.g., the literature review in discussion in OIAD/
RAND, supra footnote 3, at 11.
    \1011\ See, e.g., Thomas Pauls, Oscar Stolper, & Adreas Walter, 
Broad-Scope Trust and Financial Advice, Working Paper (Nov. 2016), 
available at https://www.researchgate.net/publication/314235638_Broad-scope_trust_and_financial_advice.
    \1012\ We acknowledge commenters' concerns that higher financial 
literacy and more disclosures alone may not fully address the risk 
that retail investors would rely on trust in their financial 
services providers over other factors, such as knowledge about 
financial services industry participants, practices and products. 
See CFA Letter I (``We've seen anecdotal evidence in our own 
personal encounters with investors of their tendency to trust their 
``financial adviser'' without actually verifying how or how much 
they are paying or how their investments are performing. Even 
investors who would be considered sophisticated by any reasonable 
measure can exhibit a level of trust and confidence in their 
financial professional that isn't based on data. Any disclosures 
about their financial professional's services, duties, costs, and 
conflicts are unlikely to change those views''); AARP Letter 
(``Recent behavioral science studies have shown that disclosures are 
largely ineffective because they tend to increase conflict in 
advisers and make the investor more likely to trust the adviser and 
thus follow biased advice''); see also Regulation Best Interest 
Release, supra footnote 47, (discussing how that rulemaking 
addresses the limitations of disclosure for customers of broker-
dealers).
    \1013\ We recognize that trust is not the only reason to rely on 
referrals; for example, there is informational value in other 
people's personal experiences.
    \1014\ See supra Section IV.B.2.a for survey evidence on the 
role of personal referrals in retail investors' choice of financial 
professionals.
---------------------------------------------------------------------------

    Further, investors may endure a mismatched relationship for a 
longer period of time than they would absent switching costs, including 
the cost of a new search and any transaction costs involved in moving 
assets from one firm to another. These costs lower a retail investor's 
incentive to look for a new firm or financial professional even if the

[[Page 33579]]

current relationship turns out to be a poor match. Both overreliance on 
trust and the presence of switching costs increase the ex-ante value of 
avoiding a mismatched relationship in the first place.
    Retail investors could increase their knowledge about the market 
for brokerage and investment advisory services, and thereby engage in a 
more efficient search, by accessing information and disclosures 
currently provided directly by firms or available in a number of 
existing regulatory forms and platforms. Current sources of information 
include, among others, Form ADV (and IAPD) and BrokerCheck.\1015\ 
However, because existing disclosures are made on multiple and 
sometimes lengthy forms, and are obtained in different ways, it can be 
difficult for investors to grasp the most important features of the 
financial services from reading these materials.\1016\ 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, 
which makes direct comparisons between broker-dealers and investment 
advisers more difficult.
---------------------------------------------------------------------------

    \1015\ See Proposing Release, supra footnote 5, at n.280. 
Investment advisers and broker-dealers may also provide additional 
information to retail investors through the firm's website and the 
retail investor's account agreement. Additionally, investment 
advisers and broker-dealers may provide information to retail 
investors through marketing materials (e.g., brochures) and other 
customer communications (e.g., fee schedules).
    \1016\ There is some evidence suggesting investors are not 
reading current disclosures. For example, RAND 2018 reports that 13% 
of surveyed investors said that they had viewed Form ADV (11% said 
they viewed both an ADV and broker account opening document, 2% had 
only reviewed Form ADV). RAND 2018, supra footnote 13.
---------------------------------------------------------------------------

    Voluntary disclosures and educational efforts made by financial 
services providers such as broker-dealers and investment advisers can 
potentially inform investors about the specific relationships they can 
have with providers and the types of services providers offer, but also 
about the overall market for financial advice and the different types 
of service providers and relationships available in the market. And 
such voluntary disclosure could, in principle, facilitate investor 
search. However, financial services providers may lack incentives to 
voluntarily disclose salient information or make the effort needed to 
educate investors about the various alternatives available to them 
because it is costly to do so. In addition to the costs of producing 
disclosures and training employees to deliver disclosures, providers 
may also perceive a risk that competitors would take advantage of 
disclosed information. Furthermore, disclosures that are not tailored 
to the provider and have more general educational value to retail 
investors have the features of a public good. If providers rely on 
their competitors to educate potential clients generally about the 
market for financial advice, there is an inefficiently low level of 
general educational material available to investors. Underprovision 
might occur even if such disclosures, were they to be provided, would 
increase the overall efficiency of the market for financial advice and 
thus benefit financial services providers as a group in the long run, 
for example, by sufficiently reducing confusion among the general 
investing public that more investors are willing to search for a 
financial services provider.
    Additionally, some broker-dealers and investment advisers may even 
privately gain from a lack of knowledge among retail investors to the 
extent they profit from attracting and retaining customers and clients 
who would be a better match with another provider.\1017\ For example, a 
customer of a broker-dealer who has a preference for active investing 
may actually be better off being a client of an investment adviser and 
paying a fixed percentage of assets per year as a fee for the advice 
instead of broker commissions each time she receives a recommendation 
that results in a transaction. However, this investor is likely a 
profitable customer for the broker-dealer. Similarly, a client of an 
investment adviser who prefers buy-and-hold investments in a few index 
funds could potentially be better off in a relationship with a broker-
dealer, by only paying a few one-time sales charges and commissions 
instead of a recurring percentage fee on the assets, which is likely 
more profitable to the investment adviser. In both of these cases, the 
firm has little incentive to provide the investor with information 
about available advice relationships that could persuade the investor 
to seek advice elsewhere or to switch to a different business line.
---------------------------------------------------------------------------

    \1017\ See, e.g., CFA Letter I (stating 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 
that they are suffering significant financial harm as a result. 
Investor confusion is relevant only because it limits the tools the 
Commission has available to address that harm . . .'').
---------------------------------------------------------------------------

    In the presence of the frictions described above, requiring firms 
and financial professionals to furnish a short summary disclosure like 
Form CRS can benefit retail investors by reducing information asymmetry 
between investors and firms and financial professionals and turning 
investor attention to more salient aspects of a firm and its services. 
In addition, as discussed above, no current required disclosure allows 
for comparability among broker-dealers and investment advisers by 
requiring disclosures on the same topics under standardized headings in 
a prescribed order to retail investors. A reduction in information 
asymmetry and improved comparability may reduce search costs for 
investors and increase their understanding about differences in offered 
relationships across firms and financial professionals, thereby 
reducing the risk of investors' hiring a provider that is a poor match 
for their needs. However, for the relationship summary to be effective 
for retail investors it must be understandable. Studies have found that 
the format and structure of disclosure may improve (or decrease) 
investor understanding of the disclosures being made.\1018\ We discuss 
these studies below.
---------------------------------------------------------------------------

    \1018\ 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).
---------------------------------------------------------------------------

    Some commenters questioned the general efficacy of disclosure in 
the context of investment advice to retail investors.\1019\ We do not 
share this view. As we discussed above, we believe a short summary 
disclosure like Form CRS can provide benefits to retail investors. 
However, as we also discussed in the Proposing Release,\1020\ we 
recognize that there may be limits to the efficacy of disclosure in 
some

[[Page 33580]]

circumstances. For example, the documented low level of financial 
sophistication of many retail investors can make it harder for them to 
process the implications of disclosure.\1021\ Another limitation of the 
efficacy of disclosure documented in research is that investors may 
have various behavioral biases, such as anchoring \1022\ and over-
confidence,\1023\ which could affect how the disclosed information is 
interpreted.\1024\ This could in turn lead investors to misinterpret, 
under-weight, or over-weight the implications of disclosures. Limited 
attention problems can also impede investors' ability to effectively 
process the implications of some disclosures.\1025\
---------------------------------------------------------------------------

    \1019\ See, e.g., AARP Letter (stating that ``[r]ecent 
behavioral science studies have shown that disclosures are largely 
ineffective because they tend to increase conflict in advisers and 
make the investor more likely to trust the adviser and thus follow 
biased advice''); Comment Letter of Economic Policy Institute (Aug. 
7, 2018) (``EPI Letter'') (stating that ``Disclosure requirements 
can be onerous, and disclosure may not only be ineffective, but 
counterproductive. For example, detailed disclosures can serve to 
bury important information, or disclosure of conflicts can be 
interpreted by consumers as evidence of honesty. Disclosure can make 
sellers more comfortable recommending products and services that are 
not in buyers' best interests, and it can make clients less 
comfortable rejecting these recommendations at the risk of giving 
offense'').
    \1020\ See Proposing Release, supra footnote 5, at Section 
IV.B.1.
    \1021\ See, e.g., L.E. Willis, Decision making and the limits of 
disclosure: The problem of predatory lending: Price, 65 Md. L. Rev. 
707 (2006) (``Willis Study''). Commenters discussed similar issues, 
see, e.g., Comment Letter of Charles Ryan (Aug. 7, 2018); CFA Letter 
I; American Investment Council Letter.
    \1022\ Anchoring bias implies undue reliance on a particular 
information signal at the expense of other signals. See, e.g., 
Robert A. Prentice, Moral Equilibrium: Stock Brokers and the Limits 
of Disclosure, 2011 Wis. L. Rev. 1059, at 1083 (2011) (explaining 
``people tend to anchor on the first information they receive, and 
then revise their judgments in the face of new information, but to 
an insufficient degree'').
    \1023\ Over-confidence bias implies over-estimation of 
probabilities of certain outcomes over objective probabilities. Id., 
at 1072, explains that ``studies indicate that people tend, in 
mathematically impossible percentages, to believe that they are 
above average in driving, auditing, and teaching.''
    \1024\ See, e.g., Jorgen Vitting Anderson, Detecting Anchoring 
in Financial Markets, 11 J. Behav. Fin. 129 (2010).
    \1025\ See, e.g., David Hirshleifer & Siew Hong Teoh, Limited 
Attention, Information Disclosure, and Financial Reporting, 36 J. 
Acct. & Econ. 337 (2003) (``Hirshleifer and Teoh Study'').
---------------------------------------------------------------------------

    In addition, academic studies find that sometimes certain 
disclosures may result in unintended consequences. In particular, 
existing research has found that conflict of interest disclosures can 
increase the likelihood that the disclosing party would act on the 
conflict of interest.\1026\ 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 (including to the customer's detriment), or it can be caused by 
``strategic exaggeration,'' aimed at compensating the disclosing party 
for the anticipated loss of profit due to the disclosure. Experimental 
evidence also suggests that disclosure could turn some clients or 
customers into ``reluctant altruists.'' \1027\ 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.\1028\ 
The above literature indicates that conflicts of interest disclosures 
may interact with psychological biases to produce unintended effects 
that undermine the intended benefits of the disclosures. 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.\1029\
---------------------------------------------------------------------------

    \1026\ See, Daylian M. Cain, George Loewenstein, & Don A. Moore, 
The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts 
of Interest, 34 J. Legal Stud. 1 (2005) (``Cain 2005 Article''); 
Daylian M. Cain, George Loewenstein & Don A. Moore, When Sunlight 
Fails to Disinfect: Understanding the Perverse Effects of Disclosing 
Conflicts of Interests, 37 J. Consumer Res. 836 (2011); Bryan K. 
Church & Xi (Jason) Kuang, Conflicts of Disclosure and (Costly) 
Sanctions: Experimental Evidence, 38 J. Legal Stud. 505 (2009); 
Christopher Tarver Robertson, Biased Advice, 60 Emory L.J. 653 
(2011). These papers study conflicts of interest in general, 
experimental settings, not specialized to the provision of financial 
advice.
    \1027\ See Jason Dana, Daylian M. Cain, & Robyn M. Dawes, What 
You Don't Know Won't Hurt Me: Costly (but Quiet) Exit in Dictator 
Games, 100 Organizational Behav. & Hum. Decision Processes 193 
(2006).
    \1028\ Sunita Sah, George Loewenstein, & Daylian M. Cain, The 
Burden of Disclosure: Increased Compliance With Distrusted Advice, 
104(2) J. Personality & Soc. Psychol. 289-304 (2013).
    \1029\ See id.
---------------------------------------------------------------------------

    Academic research has identified a set of characteristics that may 
increase the effectiveness of a disclosure document to consumers. These 
characteristics, discussed below, frame our analysis of the economic 
impacts of the proposed rule.\1030\
---------------------------------------------------------------------------

    \1030\ See George Loewenstein, Cass R. Sunstein, & Russell 
Golman, Disclosure: Psychology Changes Everything, 6 Ann. Rev. Econ. 
391 (2014). The paper provides a comprehensive survey of the 
literature relevant to disclosure regulation.
---------------------------------------------------------------------------

    Studies have found that the structure or format of disclosure may 
improve (or decrease) investor understanding of the disclosures being 
made.\1031\ Every disclosure document not only presents new information 
to retail investors but also provides a particular structure or format 
for this information that affects investors' evaluation of the 
disclosure.\1032\ 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 history relative to 
firms with no disciplinary history. If, instead, disciplinary history 
information were provided at the end of the relationship summary, the 
effect of the information could be moderated because it would no longer 
frame the other information provided to investors. Because of such 
framing effects, it is important that the structure of a disclosure 
document supports the intended purpose of the disclosure.
---------------------------------------------------------------------------

    \1031\ To that end, in order to facilitate more effective 
processing of disclosures by investors, some commenters emphasized 
the need to incorporate ``design thinking'' into the structure of 
the relationship summary. See, e.g., Fidelity Letter. See also supra 
footnotes 58-59.
    \1032\ See Amos Tversky & Daniel Kahneman, The Framing of 
Decisions and the Psychology of Choice, 211 Sci. 453 (1981).
---------------------------------------------------------------------------

    Because individuals can exhibit limited ability to absorb and 
understand the implications of the disclosed information, for example 
due to limited attention or low level of sophistication,\1033\ more 
targeted and simpler disclosures may be more effective in communicating 
information to investors than more complex disclosures. Academic 
studies suggest that costs, such as increased investor confusion or 
reduced understanding of the key elements of the disclosure, are likely 
to increase as disclosure documents become longer, more convoluted, or 
more reliant on narrative text.\1034\ Consistent with such findings, 
other empirical evidence suggests that disclosure simplification may 
benefit consumers of disclosed information.\1035\ In general, academic 
research appears to support the notion that shorter and more focused 
disclosures could be more effective at increasing investors 
understanding than longer, more complex disclosures.
---------------------------------------------------------------------------

    \1033\ See, e.g., Hirshleifer and Teoh Study, supra footnote 
1025; and Willis Study, supra footnote 1021.
    \1034\ See, e.g., Samuel B. Bonsall & Brian P. Miller, The 
Impact of Narrative Disclosure Readability on Bond Ratings and the 
Cost of Debt, 22 Rev. Acct. Stud. 608 (2017) and Alistair Lawrence, 
Individual Investors and Financial Disclosure, 56 J. Acct. & Econ. 
130 (2013); see also CCMC Comment Letter.
    \1035\ See, e.g., Sumit Agarwal, et al., Regulating Consumer 
Financial Products: Evidence from Credit Cards, NBER Working Paper 
No. 19484 (Jun. 2014), available at https://www.nber.org/papers/w19484 (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).

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

[[Page 33581]]

    Another characteristic of effective disclosures documented in 
academic research is disclosure salience.\1036\ Salience detection is a 
key feature of human cognition allowing individuals to focus their 
limited mental resources on a subset of the available information and 
causing them to over-weight this information in their decision making 
processes.\1037\ Within the context of disclosures, information 
disclosed to promote greater salience, such as information presented in 
bold text, or at the top a page, would be more effective in attracting 
attention than less saliently disclosed information, such as 
information presented in a footnote. Limited attention among 
individuals also increases the importance of focusing on salient 
disclosure signals. Some research finds that more visible disclosure 
signals are associated with stronger stakeholder response to these 
signals.\1038\ Moreover, research suggests that increasing signal 
salience is particularly helpful in reducing limited attention of 
consumers with lower education levels and financial literacy.\1039\ 
There is also empirical evidence that visualization improves individual 
perception of information.\1040\ 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).\1041\ Overall these findings suggest that problems such 
as limited attention may be alleviated if key information in Form CRS 
is emphasized, is reported closer to the beginning of the document, and 
is visualized in some manner. This is also consistent with the 
recommendation of several commenters.\1042\ However, it is also 
important to note that given a choice, registrants may opt to emphasize 
elements of the disclosure that are most beneficial to themselves 
rather than investors, while deemphasizing elements of the disclosure 
that are least beneficial to them. As discussed further in the economic 
analysis below and discussions above, the final instructions of the 
relationship summary include requirements that are designed to mitigate 
this risk. For example, the final instructions require standardized 
headers in a prescribed order, certain other prescribed language 
(including for the required conversation starters), page limits, and 
certain text features, which mitigate providers' incentives to behave 
opportunistically.
---------------------------------------------------------------------------

    \1036\ This is a view also supported by commenters. See, e.g., 
AARP Letter (``A good disclosure statement will highlight the 
information most important to the consumer.'').
    \1037\ Daniel Kahneman, THINKING, FAST AND SLOW (2013). Susan 
Fiske & Shelley E. Taylor, SOCIAL COGNITION: FROM BRAINS TO CULTURE 
(3rd ed. 2017).
    \1038\ See Hirshleifer and Teoh Study, supra footnote 1025. 
Commenters also addressed the benefit of visible disclosure signals. 
For example, the Fidelity Letter refers to Stanford Law School 
Design Principles stating ``[u]se visual design and interactive 
experiences, to transform how you present legal info to lay 
people.'' Also, Kleimann II states that ``[f]or good design, we want 
to build upon this tendency by identifying the key questions 
investors should or are likely to ask and featuring them prominently 
in the text, thus easing the cognitive task for readers. . . .'' 
Kleimann II, supra footnote 19.
    \1039\ See, e.g., Victor Stango & Jonathan Zinman, Limited and 
Varying Consumer Attention: Evidence from Shocks to the Salience of 
Bank Overdraft Fees, 27 Rev. of Fin. Stud. 990 (2014).
    \1040\ See John Hattie, VISIBLE LEARNING. A SYNTHESIS OF OVER 
800 META-ANALYSES RELATING TO ACHIEVEMENT (2008).
    \1041\ See Izak Benbasat & Albert Dexter, An Investigation of 
the Effectiveness of Color and Graphical Information Presentation 
Under Varying Time Constraints, 10-1 MIS Q. 59 (1986). However, one 
commenter noted that participants in the RAND 2018 qualitative 
interviews did not appear to process side-by-side tabular 
disclosures effectively. See Schwab Letter II.
    \1042\ See, e.g., CFA Letter I; Morgan Stanley Letter.
---------------------------------------------------------------------------

    There is also a trade-off between allowing more disclosure 
flexibility and ensuring disclosure comparability (e.g., through 
standardization).\1043\ Greater disclosure flexibility potentially 
allows the disclosure to reflect more relevant information, as 
disclosure providers can tailor the information to firms' own specific 
circumstances.\1044\ Although disclosure flexibility allows for 
disclosure of more decision-relevant information, it also allows 
registrants to emphasize information that is most beneficial to 
themselves rather than investors, while deemphasizing information that 
is least beneficial to the registrants. Economic incentives to present 
one's services in better light may drive investment advisers and 
broker-dealers to deemphasize information that may be relevant to 
retail investors.\1045\ Moreover, although standardization makes it 
harder to tailor disclosed information to a firm's specific 
circumstances, it also comes with some benefits. For example, people 
are generally able to make more coherent and rational decisions when 
they have comparative information that allows them to assess relevant 
trade-offs.\1046\ The final rules are intended to strike a balance 
between the relative benefits and costs of disclosure standardization 
versus disclosure flexibility; for example, by requiring standardized 
headings and a prescribed order of topics but allowing some flexibility 
in the firm's own wording and the order of presentation within each 
topic.
---------------------------------------------------------------------------

    \1043\ See CFA Institute Letter I.
    \1044\ See, e.g., Cambridge Letter; FSI Letter I; Mutual of 
America Letter; Northwestern Mutual Letter; SIFMA Letter; Vanguard 
Letter; Primerica Letter; TIAA Letter.
    \1045\ Commenters had similar concerns, see, e.g., EPI Letter; 
Regulatory Impact Analysis, supra footnote 853; CFA Letter I.
    \1046\ See, e.g., JR Kling, et al., Comparison Friction: 
Experimental Evidence from Medicare Drug Plans, 127 Q. J. Econ. 199 
(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, et al., Preference Reversals Between Joint and 
Separate Evaluations of Options: A Review and Theoretical Analysis, 
125 Psychol. Bull. 576 (1999).
---------------------------------------------------------------------------

D. Economic Effects of the Relationship Summary

1. Retail Investors
a. Overall Anticipated Economic Effects of Form CRS
    Overall, we expect that these final rules requiring firms to 
deliver a relationship summary will benefit retail investors in several 
ways, including by reducing information asymmetry between investors and 
firms (and their financial professionals), reducing search costs and 
facilitating easier comparisons between and among brokerage and 
investment advisory firms, and increasing understanding of, and 
confidence in, the market for financial services more generally.
    First, in the specific context of a retail investor considering a 
firm or financial professional, the relationship summary will reduce 
the information asymmetry between the investor and the firm or 
professional by increasing transparency to that investor about a firm's 
services, fees, conflicts of interest, standard of conduct, and 
disciplinary history.\1047\ Some--though not all--of this information 
is currently available in the marketplace. The relationship summary, 
however, will require all firms to provide information on these topics 
in one summary disclosure, which will be available on firms' websites, 
if they have one, at BrokerCheck and IAPD, and through Investor.gov. 
Current disclosure requirements do not provide this level of 
transparency and comparability for both broker-dealers and investment

[[Page 33582]]

advisers. In addition, through the use of layered disclosure, the 
relationship summary will facilitate investors' access to additional, 
more detailed, information. The relationship summary is also the first 
narrative disclosure for broker-dealers' retail customers that will be 
filed with the Commission and widely available to the public. We 
believe providing this overview of information in one place will 
enhance the accessibility of this information for the retail investor 
reviewing it relative to the baseline. Moreover, some information, such 
as the payments to financial professionals, is not currently required 
to be publicly disclosed, making that information available for the 
first time. The relationship summary may also benefit investors by 
helping them separate ``hard'' information about services and fees from 
marketing communications. To the extent the relationship summary will 
be effective at informing retail investors,\1048\ it should improve 
their ability to assess whether a relationship offered by a particular 
firm is a good match with their preferences and expectations. Moreover, 
a reduction in information asymmetry may also help retail investors 
increase the value from any given relationship they enter with a firm 
or financial professional by potentially increasing their ability to 
monitor the relationship and to make more informed decisions related to 
the relationship during its duration, including whether to terminate 
the relationship.
---------------------------------------------------------------------------

    \1047\ These aspects of the relationship summary are consistent 
with, for example, the disclosure items identified in the 917 
Financial Literacy Study as essential for retail investors: 
adviser's fees (76%), disciplinary history (67%), adviser's 
conflicts of interest (53%), and adviser's methodology in providing 
advice (51%); see 917 Financial Literacy Study, supra footnote 588.
    \1048\ As discussed supra, in Sections I and II, we commissioned 
the RAND 2018 report and received several surveys and studies 
provided by commenters. See supra footnotes 13-21 and accompanying 
text. Results of the RAND 2018 survey and other surveys or studies 
submitted to the comment file indicate that survey and study 
participants indicated their subjective view that a relationship 
summary would be useful for retail investors; see supra Section I 
and IV.B.3.b.
---------------------------------------------------------------------------

    Second, Form CRS will provide benefits to those retail investors 
that want to compare more than one provider or service, including those 
that want to compare brokerage and advisory services, relative to the 
baseline. Form CRS is distinct from other required disclosures as it is 
a standardized disclosure to retail investors that is broadly uniform 
between investment advisers and broker-dealers, or that requires dual 
registrants to describe both brokerage and advisory services. In 
facilitating this comparability, the relationship summary may promote 
competition between financial service providers along dimensions such 
as fees, costs, and conflicts, in ways that improve retail investor 
welfare. The comparative benefits discussed above could increase 
further should third-party data aggregators enter the market and use 
the information disclosed in relationship summaries to provide 
consolidated data on firms, as search and processing costs could be 
reduced even further for retail investors.\1049\
---------------------------------------------------------------------------

    \1049\ The requirement that the headings should be machine-
readable may facilitate such entry by third-party data aggregators.
---------------------------------------------------------------------------

    Third, we also believe that requiring all broker-dealers and 
investment advisers that serve retail investors to provide a 
relationship summary, along with the other initiatives we are adopting, 
will increase understanding of, and confidence in, the market for 
financial advice more generally. Specifically, because of confusion 
about the market for brokerage and advisory services or a general lack 
of confidence in the market, some retail investors are potentially 
discouraged from seeking a relationship with a financial provider and 
do not participate in the market for financial services.\1050\ The 
relationship summary may help spread awareness and understanding about 
the market for financial services by increasing transparency about the 
services, fees, conflicts and standard of conduct of financial 
professionals; reducing confusion among investors generally; and 
increasing the general level of confidence. This general increase in 
understanding and confidence should, in turn, make it more likely that 
investors participate in the market for financial services when 
participation is likely to benefit them.
---------------------------------------------------------------------------

    \1050\ See, e.g., OIAD/RAND, supra footnote 3, for a review of 
the academic evidence on such effects.
---------------------------------------------------------------------------

    Some commenters suggested the general benefits to investors of the 
proposed relationship summary would be limited.\1051\ More 
specifically, several commenters were concerned that retail investors 
may be subject to information overload from reading the relationship 
summary, reducing the potential benefits to investors because of the 
cognitive costs of digesting the information.\1052\ We acknowledge that 
there are limits to investor cognition with respect to lengthy and 
detailed disclosures,\1053\ however the relationship summary is shorter 
and more concise than disclosures currently available to investors, 
which should reduce the likelihood of information overload. Moreover, 
we have modified the relationship summary from the proposal to further 
streamline and shorten it, and minimize the use of legal or technical 
jargon, thereby further reducing the potential that the relationship 
summary poses a cognitive burden for retail investors that undermines 
the overall benefit of the disclosure.
---------------------------------------------------------------------------

    \1051\ See, e.g., CFA Letter I and EPI Letter.
    \1052\ Such concerns are raised in, e.g., AARP Letter; ACLI 
Letter; Rhoades Letter. Relatedly, some commenters argued that the 
relationship summary is duplicative of other disclosures and is 
unnecessary. See, e.g., supra footnote 33.
    \1053\ See supra footnote 1034 and accompanying text.
---------------------------------------------------------------------------

    We also recognize that the relationship summary, as with other 
required disclosures, has costs.\1054\ For example, as discussed above, 
there is a risk that disclosure of conflicts of interest can actually 
increase costs to investors by, for example, providing a perceived 
``moral license'' to financial professionals to act on disclosed 
conflicts and encourage them to provide more conflicted advice at the 
expense of investors.\1055\ In addition, some commenters expressed a 
belief that the disclosures in the proposed relationship summary, 
particularly due to the prescribed wording, may increase investor 
confusion \1056\ or may ``create misimpressions, and may even 
constitute outright misstatements, inaccuracies, or 
misrepresentations'' in certain contexts.\1057\ In consideration of 
these comments, the final requirements for Form CRS permit firms, 
within the parameters of the instructions, largely to describe their 
services, investment offerings, fees, and conflicts of interest using 
their own wording. The final requirements also incorporate many other 
changes in response to commenters' concerns and suggestions and 
insights from investor surveys and roundtables, which are intended to 
increase the benefits and reduce the costs to investors relative to the 
proposed disclosure. Additionally, as with required disclosures 
generally, we recognize that the relationship summary alone likely 
would not fully alleviate investor confusion or risk of mismatched 
relationships in the marketplace.
---------------------------------------------------------------------------

    \1054\ See the discussion on the limits and potential costs of 
disclosures to retail investors in supra Section IV.C.
    \1055\ Some commenters raised similar concerns. See, e.g., CFA 
Letter I.
    \1056\ See, e.g., Financial Planning Coalition Letter 
(expressing concern that Form CRS may exacerbate investor 
confusion). See supra footnotes 77 and 80 and accompanying text.
    \1057\ Committee of Annuity Insurers Letter. See supra footnotes 
76-81 and accompanying text.
---------------------------------------------------------------------------

    Moreover, firms may attempt to pass through some of the direct 
compliance costs we discuss further below to retail investors, for 
example, by charging higher commissions, asset-based management fees, 
or other fees. However, we believe such pass through of costs is likely 
to be limited because we expect these direct expenses to be

[[Page 33583]]

relatively small in the context of the overall size of the brokerage 
and investment advisory industries.\1058\ Additionally, to the extent 
the relationship summary may promote competition between financial 
service providers, as discussed above, any increase in competition both 
among and between broker-dealers and investment advisers could reduce 
the pricing power of firms, and thereby reduce the ability to pass 
through the compliance costs associated with the relationship summary.
---------------------------------------------------------------------------

    \1058\ See infra Section IV. D.2.b.(4) for a summary of 
estimates of certain compliance costs developed for the purpose of 
the Paperwork Reduction Act analysis.
---------------------------------------------------------------------------

    The magnitude of the anticipated economic effects discussed above 
will depend on a number of factors, including the extent to which the 
relationship summary will increase investors' understanding about their 
potential or current relationships with firms and financial 
professionals, and in what ways such an increase in understanding would 
affect their behavior. Given the number and complexity of assumptions 
that would be required to be able to estimate how the relationship 
summary will affect investors' understanding and their decision-making, 
and the lack of data on relevant characteristics of individual firms 
and their prospective and existing retail investors, the Commission is 
not able to meaningfully quantify the magnitude of these anticipated 
economic effects.
    We discuss the benefits and costs to retail investors of certain 
elements of the relationship summary requirements below, including 
requirements regarding length and presentation, standardization, 
content (including layered content), delivery, and filing. As part of 
these discussions, we also discuss certain changes from the proposal 
and how we anticipate those changes affect the benefits and costs of 
the final relationship summary relative to the proposed requirements.
b. Presentation and Format
    The presentation and format of the relationship summary are 
designed to facilitate retail investors' processing of the provided 
information to help them compare information about firms' relationships 
and services, fees and costs, specified conflicts of interest and 
standards of conduct, and disciplinary history, among other things. The 
relationship summary is also designed to promote effective 
communication between firms and their retail investors. Several 
features of the relationship summary should reduce some of the 
limitations discussed above that may undermine the efficacy of 
disclosures, such as cognitive limitations and disclosure overload, as 
discussed further below.
    The magnitude of the anticipated benefits and costs to retail 
investors discussed below will depend on a number of factors, including 
the extent to which the presentation and formatting requirements for 
the relationship summaries will help increase investors' understanding 
about the content of the relationship summaries, and in what ways such 
an increase in understanding would affect their behavior.
(1) Length and Amount of Information
    Unlike many other required disclosures by financial firms, the 
relationship summary has a page limit. We believe that limiting the 
disclosure length and prescribing certain elements of the relationship 
summary's content could benefit investors relative to the baseline by 
forcing firms to provide concise and clear investor-relevant 
information, thereby reducing information overload and increasing the 
likelihood that investors will focus their attention on the 
relationship summary. The optimal length of the relationship summary 
for investors may vary from investor to investor based on individual 
limits to attention and ability to process a lengthier document, though 
investor and commenter feedback indicated many investors preferred a 
relationship summary no longer than, and in some cases shorter than, 
what was proposed.\1059\ We have also reduced the page limit for 
standalone broker-dealers' and standalone investment advisers' 
relationship summaries from four to two, thereby potentially increasing 
the benefits of a shorter document relative to the proposal.
---------------------------------------------------------------------------

    \1059\ For example, 57% of RAND 2018 survey respondents 
indicated that the relationship summary was too long, 41% said it 
was about right, and roughly 2% said it was too short. RAND 2018, 
supra footnote 13. See also supra footnotes 129-139.
---------------------------------------------------------------------------

    However, we recognize that there are potential costs to requiring a 
page limit.\1060\ For example, as pointed out by commenters, a 
prescribed page limit may make it more difficult for some firms to 
effectively describe the nature or range of the relationships and may 
prompt them to exclude details that investors might find 
important.\1061\ To the extent the provided disclosure becomes too 
abbreviated it may confuse investors rather than inform them about the 
relationship, which could increase search costs and increase the risk 
of a mismatched relationship relative to the baseline. The relationship 
summary includes several elements to mitigate the potential costs of 
providing less comprehensive information by utilizing layered 
disclosure, which includes encouraging, and in some cases requiring, 
hyperlinks to additional information and other textual features, such 
as hovers, to provide descriptions or definitions of terms.\1062\ The 
relationship summary also includes conversation starters that are 
designed to elicit more substantial conversations on certain topics. 
Such conversations could further mitigate the costs of less 
comprehensive information by encouraging the providers to elaborate on 
topics that investor may find confusing.
---------------------------------------------------------------------------

    \1060\ Just as reducing the maximum page length from four to two 
for standalone broker-dealers and investment advisers could increase 
the benefits relative to the proposal; this change could also 
increase these costs relative to the proposal.
    \1061\ See supra Section II.A.2 for examples of commenters 
raising this concern.
    \1062\ See generally supra Section II.A.4 for examples of 
graphical features encouraged by the Relationship Summary 
instructions.
---------------------------------------------------------------------------

    Finally, we believe that allowing only the required and permitted 
information will promote standardization of the information presented 
to retail investors, minimize information overload, and allow retail 
investors to focus on information that we believe is particularly 
helpful in deciding among firms. However, we acknowledge that the 
potential cost of this level of standardization is that firms will not 
be able to include other information that might also be helpful to 
investors.
(2) Organization of Information and Text Features
    As discussed above, academic research has documented how individual 
perceptions of information can change depending on the framing of the 
information.\1063\ The relationship summary's requirement to use 
standardized questions as headings should help retail investors frame 
the information that follows the question by establishing sufficient 
context and increasing salience of the information presented.\1064\
---------------------------------------------------------------------------

    \1063\ See supra footnote 1032 and accompanying text.
    \1064\ The proposal had required headings to frame the 
information, but did not require they be in the form of questions. 
See supra Section II.A.2 for a discussion of comments related to the 
question-and-answer format, including its potential utility to 
investors' understanding, and our decision to require this format.
---------------------------------------------------------------------------

    The final instructions include an instruction encouraging the use 
of

[[Page 33584]]

electronic and graphical features in the relationship summary.\1065\ 
Additionally, the relationship summary requires the use of text 
features for certain information, such as the conversation starters, 
which should increase the salience of this particular information and 
increase the likelihood that investors will review it. Based on 
academic research on disclosure readability,\1066\ we believe the use 
of text features, whether voluntary or required, will facilitate retail 
investors' absorption of the provided information. Additionally, 
certain electronic features, such as embedded hyperlinks and hovers, 
should facilitate retail investors' access to additional information if 
they are interested, thereby reducing their costs in locating the 
information.
---------------------------------------------------------------------------

    \1065\ For a non-exclusive list of features the instructions 
encourage firms to use, see supra Section II.A.3. Some features are 
exclusive to electronic versions of the disclosure, such as hovers, 
while others could be used as part of a paper disclosure, such as 
comparison boxes. The benefits and attendant costs of any electronic 
features will generally be limited to those retail investors that 
access the document electronically.
    \1066\ See, e.g., supra footnote 1034 and accompanying text.
---------------------------------------------------------------------------

    We recognize that because we are encouraging, but not requiring, 
firms to use graphical and electronic features, some firms might not 
use text features beyond what is required, potentially reducing their 
use and the attendant benefits. We believe, however, that providing 
some flexibility in design to firms may provide a benefit to retail 
investors, because firms competing for retail investors likely have 
incentives to use graphical and electronic features to enhance the 
retail investor's experience. Moreover, flexibility also allows firms 
to continuously improve their use of graphical and electronic features 
as they learn over time what features are the most effective. We 
recognize, however, that one potential cost of allowing this 
flexibility is that firms may also have incentives to use certain text 
features to increase the salience of the portions of the disclosed 
information that they prefer to highlight, rather than the information 
that may be the most useful to investors to highlight.
    The final instructions do not include certain presentation 
requirements that we had proposed. For example, we proposed requiring 
that dual registrants present their information in a single 
relationship summary, using a two-column format. The final instructions 
permit dual registrants (or affiliated broker-dealers and investment 
advisers) to prepare either a single relationship summary describing 
both brokerage and investment advisory services, or two separate 
relationship summaries describing each service.\1067\ Additionally, we 
are requiring such firms to use standardized headings in a prescribed 
order, and to design their relationship summary in a manner that 
facilitates comparison, but the final instructions do not specifically 
require a two-column format. We believe this modification could 
increase the benefits relative to the proposal to investors of the 
relationship summary by permitting firms to choose design elements that 
might facilitate comparison more effectively than a two column format. 
We recognize, however, that absent a specific design requirement, some 
firms might present this information in a manner that is less effective 
at facilitating investors' understanding than the proposed two-column 
format. We believe, however, that the potential benefits of allowing 
firms with differing business models to determine the design methods 
most effective at facilitating comparability justifies the change from 
a single, prescribed design element. Additionally, the final rule does 
not adopt the proposed restrictions on paper size, font size, or margin 
width, and instead requires them to be ``reasonable.'' We believe that 
these modifications from the proposal will incentivize firms to design 
relationship summaries that most effectively and accurately communicate 
their disclosed information to the benefit of investors, as well as 
encourage firms to make interactive, electronic disclosures available.
---------------------------------------------------------------------------

    \1067\ See generally Section II.A.5 for a discussion of specific 
instructions, as well as comments received.
---------------------------------------------------------------------------

c. Standardization
(1) Standard Question-and-Answer Format and Standard Order of 
Information
    The final rules require that firms present information under 
standardized headings and respond to all the items in the final 
instructions in a prescribed order.\1068\ We expect that requiring the 
same set of headings in a prescribed order for each relationship 
summary will facilitate retail investors' ability to compare 
relationship summaries across firms. In addition, the prescribed 
wording of the headings reduces the risk that firms would use the 
headings to ``frame'' each topic in ways that would be less useful for 
retail investors' understanding of the disclosed information. As 
discussed above, academic research has documented how individuals' 
perceptions of information can change depending on the framing of the 
context of the information.\1069\
---------------------------------------------------------------------------

    \1068\ See generally infra Section II.A.2 for discussion of the 
specific instructions, as well as comments received. In terms of 
specifically adopting a question-and-answer format for the 
standardized headings, we believe that adopting this format is 
likely to increase the salience of the information under each 
heading and improve investors' cognitive engagement with the 
document, which should facilitate their understanding of the 
disclosed information.
    \1069\ See supra footnote 1032 and accompanying text.
---------------------------------------------------------------------------

    We expect retail investors to benefit from this standardization to 
the extent they review relationship summaries from more than one firm, 
as the standardized headings in the prescribed order will allow them to 
compare firms' responses.\1070\ Additionally, the requirement that 
firms structure the headings in machine-readable format could reduce 
the cost of third party data aggregators to analyze relationship 
summaries across many firms and display comparisons of responses, 
ultimately reducing search costs for investors.\1071\
---------------------------------------------------------------------------

    \1070\ See Morningstar Letter (commenting on the importance of 
standardized disclosure, that ``[f]urther, it is extremely important 
for conflict-mitigation disclosures to be standardized. . . The 
Commission could require a table, as we discuss below, for the 
Client Relationship Summary that standardizes how all broker/dealers 
list their relevant fees, making the costs of opening and 
maintaining an account transparent and comparable'').
    \1071\ Two commenters argued for machine-readability to allow 
for third party development of comparison tools. See supra footnotes 
663 and 664.
---------------------------------------------------------------------------

    Because firms will be given very limited flexibility in terms of 
language for headings and the order of the sections,\1072\ some firms 
may find it more difficult to effectively present the information 
specific to their business and circumstances they believe should be 
made salient to retail investors. To the extent that the headings and 
the specified order do not specifically promote such information for a 
particular firm, and this information is relevant to investment 
decisions, investors may potentially find the relationship summary less 
useful in evaluating the specific firm. To mitigate this potential cost 
and provide some flexibility to firms, the final rules allow firms to 
discuss the required sub-topics within each item in an order that firms 
believe best promotes accurate and readable descriptions of their 
business.\1073\ The final rules also allow firms to omit or modify a 
disclosure or conversation starter that is inapplicable to their 
business or specific required wording that is inaccurate. The benefit 
of such flexibility is that it allows firms to increase saliency of and 
direct investor attention to the more relevant

[[Page 33585]]

disclosures. We believe the mix of requiring standardized headings and 
a prescribed order of topics but allowing some flexibility in the order 
of presentation within each topic strikes an appropriate balance in the 
inevitable trade-off, discussed further below, between the relative 
benefits and costs of disclosure standardization versus disclosure 
flexibility.
---------------------------------------------------------------------------

    \1072\ See supra footnote 91.
    \1073\ The proposed instructions prescribed the order of 
information within each item. See supra footnote 121.
---------------------------------------------------------------------------

    The magnitude of the anticipated benefits and costs to retail 
investors discussed above will depend on a number of factors, including 
the extent to which the standardized headings and prescribed order of 
information will help increase investors' understanding about the 
content of the relationship summaries, and in what ways such an 
increase in understanding would affect their behavior.
(2) Prescribed Wording
    The final instructions include a mixture of limited prescribed 
wording that firms must include and requirements for firms to draft 
their own descriptions that comply with instructions about topics they 
must address.\1074\ As with any disclosure document, there are 
inevitable trade-offs between prescribing specific wording for firms to 
use (when applicable) and providing discretion to firms to use their 
own wording. We describe those trade-offs, as they relate to the final 
instructions, below.
---------------------------------------------------------------------------

    \1074\ See generally supra Section II.A.1 for a discussion of 
these instructions, comments received on the proposal, and changes 
made regarding the amount of prescribed wording.
---------------------------------------------------------------------------

    The proposed instructions would have required prescribed wording in 
several items of the relationship summary, including fees and costs and 
a comparison section for standalone broker-dealers and investment 
advisers. We explained in the Proposing Release that prescribed wording 
for these items could benefit investors through standardization and by 
improving comparability across relationship summaries, while at the 
same time could impose costs on investors if prescribed wording does 
not accurately represent a firm's services.\1075\ We are adopting final 
instructions that largely eliminate prescribed wording for most of 
these items and instead permit firms, within the parameters of the 
instructions, to respond to the relationship summary items using their 
own wording.\1076\ We continue to prescribe wording for headings, 
conversation starters, and the standard of conduct, as well as a 
factual disclosure concerning the impact of fees and costs on 
investments over time.\1077\ However, firms may omit or modify required 
disclosures or conversation starters that are inapplicable to their 
business or specific wording required by the final instructions that is 
inaccurate.\1078\ Based on feedback from commenters and observations 
reported by investor studies and surveys, this change will increase the 
benefits of the relationship summary to investors relative to the 
proposal. Specifically, several commenters suggested that some of the 
prescribed wording would not only reduce the accuracy of the 
information provided by firms but could also confuse investors about a 
firm's offerings, and we have made changes in light of those comments. 
We believe the final rules strike an appropriate balance between 
comparability between firms and the accuracy and relevance of 
information contained in relationship summaries, increasing potential 
benefits to investors relative to the proposal.
---------------------------------------------------------------------------

    \1075\ See Proposing Release, supra footnote 5, at Section 
IV.B.2.a.
    \1076\ See generally Section II.A.1.
    \1077\ See generally Section II.A.1. We discuss the benefit and 
costs of these items, including related to the prescribed wording, 
below, in Section IV.A.c.
    \1078\ See supra footnote 91.
---------------------------------------------------------------------------

    We nevertheless recognize reductions in benefits relative to the 
proposal stemming from this approach. It decreases the degree of 
standardization of the information which could impact comparability 
across relationship summaries, as suggested by some academic 
research.\1079\ However, to the extent some of the prescribed language 
in the proposed rules would be considered ``boilerplate'' by investors 
or would not be applicable to a particular firm's services or business, 
the reduction of such prescribed wording in the final rules is not 
likely to come at a cost to investors (and in fact is likely to benefit 
investors). The risk of lower standardization and comparability also is 
mitigated because, while not prescribing specific wording, the final 
instructions require prescribed topics that all firms must include in 
each item. For example, in their description of services, all firms 
must address monitoring, investment authority, limited investment 
offerings, and account minimums.\1080\ Moreover, increased flexibility 
for firms to describe their services and offerings relative to the 
proposal could impose costs on retail investors if it increases the 
potential ability of some firms to provide information in a less useful 
or clear way in their own words than when required to use prescribed 
wording.\1081\
---------------------------------------------------------------------------

    \1079\ See generally supra Section IV.C.
    \1080\ See generally supra Section II.A.3.
    \1081\ We also acknowledge there is a risk that some firms could 
use the flexibility to strategically omit or obscure information. 
Such action, however, would risk liability under Form CRS or the 
antifraud provisions of the Advisers Act. See, e.g., General 
Instruction 2.B. to Form CRS.
---------------------------------------------------------------------------

    One section proposed for standalone broker-dealers and investment 
advisers, which we referred to as the Comparisons section, had entirely 
prescribed wording.\1082\ We are not adopting this proposed section. 
Additionally, we removed prescribed wording from the proposed 
introduction, which would have noted that brokerage and advisory 
services were distinct.\1083\ On one hand, omission of the Comparisons 
section potentially could reduce the risk of information overload for 
investors. On the other hand, omitting this section might reduce 
benefits relative to the proposal by reducing the salience of 
potentially valuable comparative information available to retail 
investors at the point of forming a relationship, particularly if a 
retail investor does not review relationship summaries of multiple 
firms. We have taken specific measures to maintain some of the benefits 
we had intended to achieve in the proposed Comparisons section by using 
other methods to enable retail investors to continue to view 
comparative information and access more general educational 
information. For example, all firms must provide at the beginning of 
the document a link to Investor.gov/CRS, which offers educational 
information about investment advisers, broker-dealers, financial 
professionals and other information about investing in securities. In 
addition, dual registrants and affiliated firms that offer their 
brokerage and investment advisory services together are required to 
provide information about both types of services with equal prominence 
and in a manner that clearly distinguishes and facilitates comparison. 
This instruction applies regardless if they prepare a single 
relationship summary or two separate relationship summaries describing 
each type of service. If dual registrants prepare two separate 
relationship summaries, they must cross-reference or link to the other 
and deliver both with equal prominence and at the same time. Affiliates 
offering brokerage and investment advisory services together have 
similar presentation and delivery requirements.
---------------------------------------------------------------------------

    \1082\ See generally supra Section VI for a discussion of the 
proposed requirements as well as comments received.
    \1083\ See supra Section I.
---------------------------------------------------------------------------

    The magnitude of the anticipated benefits and costs to retail 
investors discussed above will depend on a number of factors, including 
the extent

[[Page 33586]]

to which the specific requirements regarding wording will help increase 
investors understanding about the content of the relationship 
summaries, and in what ways such an increase in understanding would 
affect their behavior.
d. Content
    The final instructions require firms to include specific items in 
the relationship summary. Below we discuss the anticipated benefits and 
costs to retail investors from these items.\1084\ The magnitude of 
these anticipated benefits and costs to retail investors will depend on 
a number of factors, including the extent to which the specific items 
of disclosure will help increase investors understanding about their 
potential or current relationships with firms and financial 
professionals, and in what ways such an increase in understanding would 
affect their behavior.
---------------------------------------------------------------------------

    \1084\ See supra Section II.B.
---------------------------------------------------------------------------

(1) Relationship and Services
    The relationship summary requires an overview of the services that 
the firm provides to retail investors.\1085\ The topics that the firm 
must discuss include principal brokerage and advisory services, 
monitoring, investment authority, limited investment offerings, as 
proposed, and, new to the adopting release, account minimums and other 
requirements. The services firms provide to retail investors vary 
widely. These differences exist not only between broker-dealers and 
investment advisers, but also within different types of broker-dealers 
and investment advisers. We believe that this section will increase the 
transparency, saliency, and comparability of information about the 
types of services, accounts, and investments provided by firms, which 
should likewise improve matching between firms and retail investors.
---------------------------------------------------------------------------

    \1085\ See supra Section II for a discussion of the requirements 
and comments received on the proposal.
---------------------------------------------------------------------------

    We have made some changes from the proposal intended to increase 
the potential matching benefit. In particular, instead of using 
prescribed wording, firms will describe their services using their own 
wording. Firms must also describe account minimums, which could improve 
matching with the provider and may reduce investor search costs, 
especially for investors that fall short of required minimums so that 
retail investors can be aware of potential limitations on their initial 
or continued eligibility for services.\1086\ Because all firms must 
describe particular topics, we believe investors can also use this 
information to compare firm services if they review multiple 
relationship summaries. We believe the approach of firms using their 
own wording to describe their services will increase the benefit to 
investors relative to the proposal by allowing firms to provide 
descriptions that are a better match for their particular services. 
This approach also avoids the cost of firms being required to make 
inaccurate or confusing disclosures given their specific business 
models, as raised by commenters.\1087\ This potential increase in 
benefit, however, comes with attendant potential increases in costs to 
the extent that firms do not present the most relevant aspects of their 
services or their descriptions are unclear, as discussed in the 
considerations regarding prescribed wording above. On balance, we 
believe that allowing for a description that is accurate and better 
matched to a firm's services likely would be more beneficial and less 
confusing to investors.
---------------------------------------------------------------------------

    \1086\ Disclosures of account minimums could also help make 
retail investors more focused on their future planning needs, for 
example, by incentivizing them to target minimal future investment 
levels to reach an asset value level that will make lower fees or 
additional services available from a particular provider.
    \1087\ See, e.g., supra footnote 269.
---------------------------------------------------------------------------

(2) Fees and Costs, Standard of Conduct, and Conflicts of Interest
    The relationship summary requires several prescribed questions and 
required responses about fees, conflicts of interest, and the standard 
of conduct.\1088\ Some of this information will be required to be 
provided to investors for the first time, such as an articulation of 
the standard of conduct. Other information, while currently available 
in various sources, will be presented centrally in the relationship 
summary, with links to more detailed, layered information about fees 
and conflicts. Additionally, providing retail investors with context 
for the more detailed information could potentially pique their 
interest and lead retail investors to seek more information about fees 
and conflicts through the required links. We believe both the 
information not previously required and the consolidated summary of 
information already available elsewhere will benefit investors by 
increasing salience, transparency, and comparability, and reducing 
information asymmetry compared to the baseline. More specifically, 
including these disclosures prominently, in one place, in a digestible 
manner, at or before the start of a retail investor's relationship with 
a firm or financial professional could facilitate meaningful disclosure 
in the relationship summary, as well as conversations between the 
retail investor and his or her financial professional, and help the 
retail investor decide on the types of services that are right for him 
or her. In addition, to the extent that the specified conflicts of 
interest disclosures could draw retail investors' attention to 
conflicts, they may improve retail investors' ability to select and 
monitor firms and financial professionals.
---------------------------------------------------------------------------

    \1088\ See supra Section III for a discussion of the 
requirements and comments received on the proposal.
---------------------------------------------------------------------------

    The fees, costs, and conflicts disclosure also potentially has 
costs for investors. In particular, and as discussed above,\1089\ the 
perception that an investor has been warned (via the disclosure) of a 
firm's and financial professional's potential bias may lead some 
financial professionals to believe that they are less obligated to 
provide unbiased advice. Further, the standard of conduct and conflict 
disclosures could make firms and financial professionals appear more 
trustworthy and as a result reduce the incentives for retail investors 
to examine additional information more carefully. Conversely, a 
potential cost for investors of such disclosures is that some investors 
may mistakenly leave the market for financial services or choose to not 
engage with a financial professional because they infer from the 
discussion of conflicts of interest and fees that a financial 
professional could provide bad advice or recommend products that will 
reduce their financial well-being. However, the placement of the 
prescribed standard of conduct disclosure immediately preceding the 
conflicts disclosure may alleviate the risk that investors will 
overreact to the conflicts of interest disclosure in this manner, 
because the standard of conducts disclosure clarifies that the firm or 
financial professional must act in the investor's best interest.
---------------------------------------------------------------------------

    \1089\ See supra footnote 1026 and accompanying text.
---------------------------------------------------------------------------

    We received significant comments about the potential efficacy of 
the proposed disclosures related to fees and costs, conflicts, and the 
standard of conduct, and the ultimate benefit of such disclosures to 
investors. Likewise, feedback from investors through surveys and 
studies and in Feedback Forms revealed confusion about the proposed 
standard of conduct section in

[[Page 33587]]

particular.\1090\ Results reported in investor surveys and studies also 
showed that the proposed conflicts section was rated one of the least 
useful sections, which may suggest that some investors did not 
understand the role of conflicts based on the disclosure as presented 
by the sample proposed dual registrant relationship summary.\1091\ We 
have made several changes from the proposed relationship summary 
designed to increase the clarity and salience of the disclosures, 
thereby increasing the potential benefit and reducing the potential 
costs discussed above relative both to the baseline and the proposal. 
We also believe the changes will reduce the risk that investors will 
not read the section or will misinterpret it, increasing the 
effectiveness of these disclosures and therefore the potential benefit.
---------------------------------------------------------------------------

    \1090\ See supra footnotes 475-478 and accompanying text.
    \1091\ See supra footnotes 522-524 and accompanying text.
---------------------------------------------------------------------------

    First, by integrating the section covering fees, costs, conflicts 
of interests, standard of conduct, and how representatives are 
paid,\1092\ we believe retail investors may be more primed to process 
implications of these disclosures in a more integrated fashion due to 
their proximity. In particular, providing these disclosures in the same 
section could increase the salience of this information for 
investors,\1093\ both relative to the proposal and the baseline, and 
may potentially improve investor cognitive processing of how conflicts 
of interest can have an impact on the services and advice provided and 
costs paid by investors.
---------------------------------------------------------------------------

    \1092\ See supra discussion in Section II.A.4.
    \1093\ This is also consistent with some commenters' suggestions 
and the organization of several sample relationship summaries 
submitted by commenters. See supra footnote 373 and accompanying 
text.
---------------------------------------------------------------------------

    Second, with respect to fees, the relationship summary requires 
firms to discuss under separate question headers (i) the principal fee 
and the incentive that it creates and (ii) other fees and costs that 
the investor will pay. We are requiring firms to summarize, in their 
own words, the principal fees and costs that retail investors will 
incur, including how frequently they are assessed and the conflicts of 
interest that they create. We think investors will be better able to 
process the implications of the principal fee disclosure through this 
requirement. Additionally, requiring firms to describe other fees and 
costs investors will pay, distinct from the principal fee, will clarify 
for investors that they pay not only a principal fee for advice, but 
also additional fees and costs. This may potentially prompt investors 
to use the required link to learn more information, ask follow-up 
questions, or monitor for such fees and costs.
    Third, the instructions require that the standard of conduct 
disclosure be placed under the same header as the summary of firm-level 
conflicts. The expected benefit of placing these conflicts of interest 
and standard of conduct disclosures together is to improve investor 
processing of the implications of conflicts of interest disclosure and 
legal obligations underlying the particular standard of conduct (i.e., 
best interest for broker-dealers and fiduciary duty for investment 
advisers) as well as to prevent investor misinterpretation of these 
disclosures. We continue to prescribe wording for the standard of 
conduct, which we believe will have greater benefits than giving firms 
flexibility to describe the standard of conduct. Unlike other areas 
where we are allowing firms to use their own words, the standard of 
conduct, whether a fiduciary duty for an investment adviser or 
Regulation Best Interest for a broker-dealer, applies during the course 
of the adviser's relationship or where a broker-dealer makes 
recommendations. We also changed from the proposal the specific wording 
in an effort to simplify the disclosure relating to the standard of 
conduct and thereby increase understanding by investors. We believe 
reducing the length and the complexity of the prescribed wording for 
the standard of conduct will increase the salience and comprehension of 
the required standard of conduct disclosure, because a more readable 
and shorter disclosure is less likely to be ignored by investors due to 
information overload and limited attention.
    While retail investors may benefit from understanding the standard 
of conduct that firms and financial professionals are subject to when 
providing investment advice or recommendations, discussing the standard 
of conduct in connection with conflicts of interest may benefit 
investors by making it clear that the standard of conduct does not mean 
that advice is conflict-free.
    Regarding the conflicts disclosure itself, we have added a new 
requirement that if none of the enumerated conflicts required to be 
disclosed by the instructions is applicable to a firm, the firm must 
select at least one of its material conflicts to describe. This was 
designed to eliminate the potential that firms would not have to 
disclose any conflicts, which would have been costly to investors if it 
caused them to believe that the firm had no conflicts. The relationship 
summary does not require disclosure of all conflicts but does require 
firms to include a link to additional information about their 
conflicts. We believe this will benefit investors relative to the 
baseline by providing sufficient information about certain conflicts to 
increase their understanding of incentives generally and potentially 
inducing them to review the linked information, which also minimizes 
the potential for information overload.
    Finally, in addition to requiring firm-level conflicts, the 
relationship summary includes a separate question and required response 
about how financial professionals are compensated and the conflicts of 
interest those payments create. This disclosure will distinguish firm-
level from financial professional-level conflicts, which we believe 
will benefit retail investors by helping them better understand the 
role of conflicts and how these conflicts might impact a financial 
professional's motivation when providing investment advice.
    Despite the changes to presentation of fees, costs, conflicts, and 
standard of conduct relative to the proposal to increase clarity, we 
recognize the complexity of these issues. Accordingly, we recognize 
benefits to investors could be limited by investors' potential lack of 
ability to comprehend the disclosure.\1094\ In the extreme, standards 
of conduct disclosure may also have a reverse effect of unduly 
enhancing investor trust in providers because investors may misperceive 
providers as holding themselves to a standard higher than legally 
required, and making investors discount the severity of the disclosed 
conflicts.\1095\ Because firms have some flexibility to decide what 
additional fees and costs to describe and, in the case of a firm with 
none of the enumerated conflicts, which conflict to use as an example, 
benefits could be reduced to the extent that they choose examples that 
are not informative to the retail investor. Additionally, there could 
be a cost to investors to the extent they believe the enumerated fees 
and conflicts in the relationship summary are the only fees and 
conflicts the firm has, although we believe that the required wording 
that explains the

[[Page 33588]]

summarized conflicts are examples, as well as the required links to 
more information about fees and conflicts, mitigate the risk of this 
misperception.
---------------------------------------------------------------------------

    \1094\ See supra footnotes, 378-382, 475-478, 522-524, and 
accompanying text, for a discussion of comments and investor survey 
results on the comparative difficulty for investors to comprehend 
these disclosures.
    \1095\ See, e.g., Betterment Letter I (Hotspex), supra footnote 
18 (reporting that only 26% of participants correctly identified as 
false a statement that broker-dealers are held to a fiduciary 
standard).
---------------------------------------------------------------------------

    In addition, referencing academic research on the potential 
negative effects of conflicts of interest disclosure, several 
commenters expressed concerns that the proposed required disclosure of 
conflicts of interest in the relationship summary could lead to a 
``moral license'' for financial professionals to provide even more 
biased advice and thus take unfair advantage of investors, or lead 
investors to fail to discount biased advice, trust their providers even 
more or make them feel pressured to remain in a potentially 
disadvantageous relationship, i.e., the panhandler effect.\1096\ 
Despite the changes we have made from the proposal to the required 
conflicts of interest disclosure in the final instructions, we 
acknowledge that there is still some risk for such negative unintended 
consequences.
---------------------------------------------------------------------------

    \1096\ See, e.g., Better Markets Letter; AARP Letter; Warren 
Letter; CFA Letter I; see also supra Section IV.C for a discussion 
of moral license.
---------------------------------------------------------------------------

(3) Disciplinary History
    As proposed, the relationship summary will contain a section where 
firms must state in binary fashion whether or not they have 
disciplinary history, as well as include a reference to Investor.gov/CRS, where investors can conduct further search for additional 
information on those events.\1097\ We have made a change to increase 
the salience of this information relative to the proposal by making a 
separate Disciplinary History section, including its own question and 
required response, rather than--as proposed--including it with other 
content in an Additional Information section, which should increase any 
benefits or costs relative to the proposal.
---------------------------------------------------------------------------

    \1097\ See supra Section II.B.4 for a discussion of the 
requirements and comments received on the proposal.
---------------------------------------------------------------------------

    The primary benefit of the disciplinary history disclosure relative 
to the baseline is that investors will be alerted to a potential need 
to search and review their provider's disciplinary information and will 
have a mechanism to find more information about any disciplinary 
history. Although this information already exists publicly, clearly 
linking to Investor.gov/CRS for further information about disciplinary 
history at the time investors are selecting a firm or financial 
professional will help retail investors know where to find additional 
information about those events, which should reduce search costs and is 
an improvement relative to the baseline.\1098\ The conversation 
starters also will provide investors with a cue to the importance of 
understanding the disciplinary history and could trigger more 
information gathering and ultimately more effective cognitive 
processing of this disclosure. As a result, an investor may choose to 
not engage a firm or financial professional if the disciplinary history 
is considered to be too problematic, or, if an investor chooses to 
proceed with a provider that has some concerning disciplinary history, 
awareness of those events could provide incentives to the investor to 
monitor his or her account more carefully than if she were not aware.
---------------------------------------------------------------------------

    \1098\ See, e.g., RAND 2018, supra footnote 13 (when investors 
were asked why they would not look up disciplinary history, 37% of 
all respondents indicated that they did not know where to get the 
information, whereas 19% of all respondents indicated that it would 
take too much time or effort).
---------------------------------------------------------------------------

    The potential cost is that investors may overreact to the ``yes'' 
or ``no'' response reported in the Disciplinary History section. 
Investors may attribute the disciplinary history of one or few 
financial professionals at a firm to the entire firm, and thus choose 
not to select a provider that could be a good match for them (for 
example, a larger firm with more employees and thus a greater 
likelihood of disclosable events) \1099\ or avoid hiring a financial 
professional altogether. Retail investors may also misinterpret a 
higher baseline rate of disciplinary history for broker-dealers than 
for investment advisers, given that the scope of events that trigger a 
disclosure event is arguably broader for broker-dealers than for 
investment advisers.\1100\ As a result, retail investors may avoid 
choosing a broker-dealer, even when such a relationship would be a 
better match for the investors. Relatedly, investors may over-rely on 
lack of disclosure of disciplinary history as evidence of more ethical 
conduct; however, lack of such disclosures may be due to unrelated 
factors such as a comparatively short history of a particular firm or 
fewer employees (and thus less likelihood of having employees with 
disclosable events). However, the risk of some investors 
misinterpreting, or over-relying on, the disciplinary history should be 
mitigated to the extent firms or financial professionals provide more 
information about and encourage retail investors to ask follow-up 
questions regarding the nature, scope, or severity of any disciplinary 
history. On balance, we believe the benefits to investors from 
including the disclosure on disciplinary history, as discussed above, 
justify any potential negative effects.\1101\
---------------------------------------------------------------------------

    \1099\ See supra Section II.B.4.
    \1100\ See id.
    \1101\ This view is supported by survey evidence that suggests 
that investors consider disciplinary history to be an important 
factor when searching for a provider of investment advice. See supra 
footnote 996; see also supra footnotes 566 and 567.
---------------------------------------------------------------------------

(4) Additional Information
    The relationship summary will conclude with a section where 
registrants will let investors know where investors can find additional 
information about their services and request a copy of the relationship 
summary, which should benefit investors relative to the baseline by 
providing this general resource, in addition to the links or references 
provided throughout the document.\1102\ In a change from the proposal, 
the Additional Information section eliminates the proposed requirement 
to provide information on how investors should report complaints about 
their investments, accounts, or financial professionals. Instead, we 
are requiring a conversation starter on whom investors should contact 
about their concerns. The benefit of this approach is that it improves 
readability of the form by reducing prescribed wording and potentially 
facilitates a conversation between investors and their financial 
professionals; the cost of this approach is that some investors will 
not have access to direct instructions on how to report their 
complaints. Finally, investors with limited or no access to internet 
(e.g., due to costs of internet access or due to a disability) will 
also benefit from a requirement that firms provide a number through 
which retail investors can request up-to-date information or a copy of 
the relationship summary.
---------------------------------------------------------------------------

    \1102\ See supra Section II.B.5 for a discussion of the 
requirements and comments received on the proposal.
---------------------------------------------------------------------------

(5) Conversation Starters
    Disclosures currently required by investment advisers and broker-
dealers generally do not have suggested questions for investors to ask 
their financial professional. The relationship summary will require 
firms to incorporate suggested follow-up questions for the investor to 
ask, which the instructions refer to as ``conversation starters.'' 
\1103\
---------------------------------------------------------------------------

    \1103\ See supra Section II.B.2.c for a discussion of the 
requirements and comments received on the proposal.
---------------------------------------------------------------------------

    Conversation starters should benefit investors relative to the 
baseline by improving the potential to match investors with providers 
that provide services more suitable to the investors'

[[Page 33589]]

preferences and needs. We believe that this is accomplished through 
enabling the investor to be more engaged, potentially assisting the 
investor with comprehension of relevant disclosures, and assisting the 
investor in receiving more personalized information than the firm-level 
disclosure documents, such as Form ADV or documents issued by broker-
dealers. That is, to the extent that these conversation starters 
promote more transparency and better communication between investors 
and financial professionals, retail investors are more likely to 
understand the information and select the right firm or financial 
professional to meet their preferences and expectations. In addition, 
to the extent the conversation starters help increase investors' 
engagement in a selected relationship it may also increase their 
monitoring of their relationship and more critically evaluate any 
advice or recommendations they receive. However, a closer personal 
engagement between retail investors and financial professionals may 
cause some investors to feel social pressure to act on the advice or 
recommendations of the professional due to a panhandler effect,\1104\ 
which may attenuate some of the benefits of the conversation starters.
---------------------------------------------------------------------------

    \1104\ See supra footnote 1028 and accompanying text.
---------------------------------------------------------------------------

    A potential cost associated with the conversation starters is that 
the particular required questions may anchor the attention of retail 
investors to those prescribed questions and reduce the likelihood that 
they would explore other potential questions that could be important to 
them based on their individualized circumstances. In response, we have 
reframed the proposed questions, which were at the end of the proposed 
relationship summary as ``Key Questions,'' and instead have integrated 
them within the relevant information item throughout the relationship 
summary to reduce the risk that investors only focus on this set of 
questions in their discussions.\1105\ Moreover, many of the 
conversation starter questions are broad and open-ended, which could 
further mitigate the risk of investors' anchoring on the content of 
these questions at the expense of the other disclosures in the 
relationship summary.
---------------------------------------------------------------------------

    \1105\ See supra Section II.A.4. for discussion on conversation 
starters.
---------------------------------------------------------------------------

    As pointed out by one commenter, unless the ``Key Questions'' in 
the relationship summary are provided to investors in advance, some 
retail investors may entirely ignore these questions.\1106\ As 
discussed above, the final rules incorporate the questions as 
``conversation starters'' directly in the different sections of the 
relationship summary, which should increase their salience and reduce 
the risk of them being ignored by investors compared to the proposal. 
In addition, because the relationship summaries will be available to 
investors online on firms' websites or through Investor.gov/CRS, the 
relationship summaries may be downloaded and accessed by some investors 
prior to meeting a financial professional, which would give such 
investors the opportunity to review the conversation starters before 
meeting a financial professional.
---------------------------------------------------------------------------

    \1106\ See CFA Institute Letter I.
---------------------------------------------------------------------------

e. Filing, Delivery, and Updating Requirements
(1) Filing Requirements
    The final instructions require firms to file their relationship 
summaries with the Commission (using IARD, Web CRD[supreg], or both, as 
applicable), and make their relationship summaries available on their 
websites. In addition to firms' websites, firms' most recent 
relationship summaries will be accessible to the public through IAPD 
and BrokerCheck, public interfaces of IARD and Web CRD[supreg], 
respectively. Investors also will be able to use the Commission's 
website Investor.gov, which has a search tool on its main landing page 
and at Investor.gov/CRS that links to BrokerCheck and IAPD. If 
investors prefer, they may request copies of firms' relationship 
summaries by calling the numbers that firms must include in their 
relationship summaries. We expect that making firms' relationship 
summaries accessible in these ways should reduce investor search costs 
in connection with selecting investment firms or financial 
professionals. We also believe that retail investors could benefit from 
their ability to access the relationship summaries independently 
through the companies' websites, BrokerCheck, IAPD, or Investor.gov 
prior to any contact with a financial professional. Such access could 
increase retail investors' understanding about differences between 
firms and financial professionals even before approaching a particular 
firm or financial professional, which could reduce search costs for 
investors early on in the search process and further reduce the risk of 
a mismatched relationship. The online availability of the relationship 
summaries will also enable investors who are currently not 
participating in the market to become better informed about the market 
for financial advice and the particular relationships provided without 
the need to incur the cost of actively contacting a firm or financial 
professional, which may ultimately encourage them to seek out a 
relationship with a provider.
    In addition, the online availability of the relationship summaries 
in central locations and the machine-readable headers of the summaries 
will allow third-party data aggregators to more easily collect 
relationship summaries and facilitate the development of comparison 
tools for the investing public. To the extent such tools and metrics 
are developed, it could facilitate investors' searches by helping them 
narrow the set of available financial service providers to those that 
are most likely to provide a good match. However, the benefits to 
investors from the development of such tools will be mitigated by any 
fees charged by third-party aggregators for access to the tools.
(2) Delivery and Updating Requirements
    Firms will deliver a relationship summary to each new or 
prospective retail investor based on the initial delivery triggers 
specific to investment advisers, broker-dealers, and dual 
registrants.\1107\ Firms also must deliver the relationship summary to 
existing clients and customers who are retail investors in certain 
circumstances.\1108\ For these existing clients and customers, the 
final rules require that firms deliver the relationship summary 
(including updates) in a manner consistent with the Commission's 
electronic delivery guidance and the firm's existing arrangement with 
that client or customer.\1109\
---------------------------------------------------------------------------

    \1107\ See supra Section II.C.3.b.
    \1108\ See supra Section II.C.3.c.
    \1109\ See supra Section II.C.3.a.
---------------------------------------------------------------------------

    Because retail investors may face substantial switching costs when 
they move from one financial professional to another, the benefits 
associated with finding a good match may be particularly significant. 
Accordingly, investors' benefits should increase in accordance with 
their ability to understand and compare relationship summaries, which 
may take time. We recognize that, as some commenters noted, if a 
financial professional delivers the relationship summary at the time of 
service, retail investors may not have sufficient time to thoroughly 
evaluate the financial professional or may have already made a 
preliminary decision to engage the particular financial professional by 
the time they receive the relationship summary. As discussed above, 
however, there are

[[Page 33590]]

compliance uncertainties and other costs associated with requiring a 
relationship summary be delivered at first contact or requiring a 
waiting period, as suggested by some commenters.\1110\ First contact 
between an investor and a financial professional may include 
circumstances that are not limited to the seeking of investment advice, 
such as business interactions for other purposes or social 
interactions. In addition, as noted by commenters, a waiting period may 
prevent investors from meeting certain deadlines.\1111\ As we discuss 
above, the availability of relationship summaries online may mitigate 
the concern that retail investors will not have enough time to review 
them, to the extent that it provides retail investors an opportunity to 
compare firms before contacting them to obtain services.
---------------------------------------------------------------------------

    \1110\ See supra footnotes 720-724 and accompanying text.
    \1111\ See supra footnote 719 and accompanying text.
---------------------------------------------------------------------------

    We expect that the rules regarding form of delivery--electronic or 
paper--generally will be beneficial for retail investors relative to 
the baseline by enabling a form of delivery that is a good match for 
the particular retail investor. For retail investors who prefer 
electronic delivery, electronic forms of delivery should facilitate 
both the engagement with and the processing of the disclosed 
information, particularly the required and optional hyperlinks and 
other features. For the investors who prefer paper documents, paper 
delivery should result in greater likelihood of the investor paying 
attention to the relationship summary disclosures. We believe that 
maintaining the mode of delivery consistent with the way information 
was requested for new customers and consistent with existing 
arrangements for existing customers will help to further ensure that 
the investors will not miss and will process the information contained 
in the relationship summaries. Customers requesting the relationship 
summary in paper format may be less likely to access the additional 
information available through the electronic means of access discussed 
above, which could result in their inability to process potentially 
important additional information.
    We also believe that existing clients and customers of broker-
dealers and investment advisers that are retail investors will benefit 
from the requirement that firms deliver the relationship summary again 
if they: (i) Open a new account that is different from the retail 
investor's existing account(s); (ii) recommend that the retail investor 
roll over assets from a retirement account into a new or existing 
account or investment; or (iii) recommend or provide a new brokerage or 
investment advisory service or investment that does not necessarily 
involve the opening of a new account and would not be held in an 
existing account, for example, the first time purchase of a direct-sold 
mutual fund or insurance product that is a security through a ``check 
and application'' process, i.e., not held directly within an account.
    This requirement should have the benefit of increasing retail 
investors' attention to disclosures provided in the relationship 
summary and the implications of new services or account options at the 
time of that decision. Additionally, the instructions require firms to 
update their relationship summaries to existing retail clients or 
customers if the existing relationship summary becomes materially 
inaccurate, which would include information that is materially outdated 
or materially incomplete. Firms must communicate the changes by 
delivering the amended relationship summary or by communicating the 
information through another disclosure that is delivered to the retail 
investor. Firms delivering the amended relationship summary must 
highlight the most recent changes by, for example, marking the revised 
text or including a summary of material changes and attaching the 
changes as an exhibit to the unmarked amended relationship summary. 
Investors should benefit from receiving updated relationship summaries 
under these circumstances because this information is relevant to the 
decision of whether to enter into new services or continue existing 
services, based upon whether the new or existing services match or 
continue to match their preferences and expectations. The requirement 
to attach revised text or a summary of material changes to the amended 
relationship summary should benefit retail investors by helping them to 
process the new information quickly. However, we recognize that to the 
extent that retail investors with established financial professional 
relationships tend to remain in such relationships, it may attenuate 
the benefits of receiving the relationship summary again.
2. Broker-Dealers and Investment Advisers (Registrants)
a. Benefits to Registrants
    Beyond benefits to retail investors, we also expect broker-dealers 
and investment advisers potentially to benefit from the relationship 
summary. Some retail investors, who could benefit from obtaining advice 
and other services from financial professionals, currently may choose 
to stay out of the market for financial services because they do not 
understand what type of firm or financial professional they require. 
The relationship summary may provide a clear and concise document that 
may draw new investors to the market. If the relationship summary draws 
new retail investors to the market for financial services, both broker-
dealers and investment advisers may gain new customers and clients, 
respectively. An increase in new retail investors could enhance 
revenues for firms and financial professionals, although firms and 
financial professionals could also bear additional costs, which are 
discussed below.
    Moreover, the relationship summary could provide additional 
benefits to firms and financial professionals by improving the 
efficiency of the search process in the market for financial advice. 
For example, retail investors will be able to access and obtain 
relationship summaries for any number of firms online, including both 
broker-dealers and investment advisers. To the extent investors use 
this feature at the start of their search for a firm, they are more 
likely to opt to approach only firms that ex ante meet their 
preferences and expectations. Thus, broker-dealers and investment 
advisers may be less likely to expend time and effort meeting and 
discussing their business model and services with prospective customers 
and clients, who are seeking a different kind of relationship and that 
would ultimately not engage in a relationship with the firm or 
financial professional. Instead, firms and financial professionals can 
devote their efforts to acquiring customers and clients that are more 
likely to contract for their services. In addition, to the extent the 
relationship summary leads to fewer retail investors entering or 
remaining in a mismatched relationship that does not meet their 
expectations, it may benefit firms by reducing costly customer 
complaints and arbitrations.
    While some commenters suggested that brokers have incentives to 
provide ineffective disclosures,\1112\ academic studies show that 
sellers can benefit from better disclosure of product quality 
information to the buyers, and competitive sellers thus have incentives 
to disclose better information.\1113\ While

[[Page 33591]]

some disclosure documents may contain topics of material that investors 
may not understand or prioritize, the relationship summary has been 
designed to focus on issues already identified by retail investors to 
be of first-order importance with respect to their relationship with 
their financial professional,\1114\ such as fees and costs, conflicts 
of interest, and disciplinary history of firms and financial 
professionals, among other items.\1115\ Further, the relationship 
summary is intended to be clear, concise, and readable, while 
permitting firms the flexibility to provide information pertinent to 
their business model and services offered. Finally, firms may benefit 
from providing more clear and understandable disclosures to the extent 
it will facilitate a more efficient matching process with prospective 
investors. Firms could also bear potential legal liability \1116\ and 
reputational costs as a result of providing potentially less 
transparent disclosures. For these reasons we believe registrants will 
generally have incentives to use the discretion permitted in the final 
instructions to design a relationship summary that is effective at 
informing retail investors about the nature of their business and 
offerings.
---------------------------------------------------------------------------

    \1112\ See, e.g., CFA Letter; Warren Letter.
    \1113\ Steven Tadelis & Florian Zettelmeyer, Information 
Disclosure as a Matching Mechanism: Theory and Evidence from a Field 
Experiment, 105 Am. Econ. Rev. 886 (2015); see also Tao Zhang, et 
al., Information disclosure strategies for the intermediary and 
competitive sellers, 271 Eur. J. Operational Res. 1156 (2018).
    \1114\ RAND 2018, supra footnote 13 (survey results re: 
Importance of each topic to respondents).
    \1115\ See supra Section IV.B.3.b.
    \1116\ See supra footnotes 92-105 and accompanying text 
(discussing the parameters for the scope of information expected 
within the relationship summary and the antifraud standard as 
applied to the relationship summary).
---------------------------------------------------------------------------

    The magnitude of the anticipated benefits discussed above will 
depend on a number of factors, including the extent to which investors' 
will change their behavior as a result of receiving the relationship 
summary and how firms and financial professionals will react to such a 
change. Given the number and complexity of assumptions that would be 
required to be able to estimate how the relationship summary will 
affect investors' understanding and their decision-making, and the lack 
of data on relevant characteristics of individual firms and their 
prospective and existing retail investors, the Commission is not able 
to meaningfully quantify the magnitude of these anticipated benefits.
b. Costs to Registrants
    The final rule will also impose costs on affected broker-dealers 
and investment advisers, including: costs associated with preparation, 
filing, delivery, and firm-wide implementation of the relationship 
summary; costs of the associated recordkeeping rules; and as well as 
training, monitoring, and supervision for compliance. We expect that 
these costs may differ across firms depending on their type (broker-
dealer or investment adviser), size, and complexity of business. We 
discuss these costs in more detail below. The Commission has, where 
possible, quantified the costs expected to result from the final rules 
in the analysis below. However, we are unable to quantify some of the 
potential costs discussed below, because of the number and complexity 
of assumptions that would be required to be able to estimate how the 
relationship summary will affect investors' understanding and choice of 
financial services provider and the lack of data on relevant 
characteristics of individual firms and their prospective and existing 
retail investors.
(1) Preparation, Implementation, and Content
    Registrants will incur costs in connection with preparing and 
implementing the relationship summary. With respect to aggregate 
compliance costs, as discussed in more detail below, some commenters 
suggest these costs could be high.\1117\ One commenter provided a 
survey of financial professionals that indicate that 79% of survey 
participants agree that implementation costs may be higher at first but 
will likely lessen over time, and 40% of firms in the same survey 
anticipate moderate or substantial time to implement the requirements 
of Form CRS (and Regulation Best Interest).\1118\
---------------------------------------------------------------------------

    \1117\ See infra Sections V.A.1 and V.D.1 for examples of 
commenters discussing the costs.
    \1118\ See CCMC Letter (Survey conducted by FTI Consulting of 30 
individuals at 15 broker-dealers and dually-registered firms 
representing $23.1 trillion in assets under management and 
administration (AUM/AUA), and 78.54 million investment accounts).
---------------------------------------------------------------------------

    Broker-dealers currently are not required to prepare a consolidated 
disclosure document for their customers similar to the Form ADV, Part 
2A brochure and may incur comparatively greater costs in preparing the 
relationship summary than investment advisers, given that investment 
advisers can draw on their experience with preparing and distributing 
Form ADV Part 2A. The Commission believes that costs of preparation 
would also fall differently 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.
    The relationship summary requires the use of standardized headings 
in a prescribed order, while permitting some flexibility in other 
aspects of the relationship summary's wording and design within the 
parameters of the instructions. There is a trade-off in terms of 
preparation costs to registrants between requirements that prescribe 
specific wording and formats for disclosures and requirements that do 
not provide any prescribed language and format. For example, we would 
expect that the more extensively the relationship summary would rely on 
prescribed format and wording, the lower the preparation costs for 
providers, because there would be less need for them to devote 
resources to construct their own format and wording. On the other hand, 
the more extensively the relationship summary would rely on prescribed 
format and wording, the more likely it would turn into a ``one-size-
fits-all'' document with largely boilerplate language, and firms would 
lose the benefit of being able to more precisely and accurately 
describe their own business and offerings to investors. We believe the 
final instructions strike an appropriate balance in this trade-off, 
with some higher-level prescribed format and language, such as the 
standardized language and order of headings, while firms generally will 
be able to (and have to) choose their own wording and organization of 
the required information under each heading.
    The final instructions provide for more flexibility than the 
proposed instructions. We acknowledge that this change could increase 
certain compliance costs relative to the proposal, as firms will have 
to develop more of their own wording and organization of the 
information that is required to be included. However, the flexibility 
permitted by the final instructions is mainly in terms of the wording 
while the topics and sub-topics of information that are required to be 
discussed are largely proscribed. This narrows the field of subjects 
that firms could choose to discuss and potentially mitigates the cost 
increase from additional flexibility. Moreover, we believe that the 
expected benefits of this additional flexibility justify this cost 
increase. In particular, we expect this change from the proposal to 
benefit firms by allowing them to more

[[Page 33592]]

accurately describe their services and offerings to retail 
investors.\1119\ We also expect the additional flexibility to benefit 
both firms and retail investors to the extent it results in disclosures 
that are more engaging and useful to investors and mitigates the 
possibility of a mismatch. In addition, several commenters requested 
greater flexibility to provide accurate descriptions of their business 
models and services, noting the potential for liability for prescribed 
disclosures in the proposal that might not be accurate for a particular 
registrant's business.\1120\ Some topics, however, will require firms 
to use prescribed wording, such as the headings, conversation starters, 
statement of their legal standard of conduct, and two statements 
related to fees and costs, for the reasons generally discussed in 
Section II.A.1.\1121\
---------------------------------------------------------------------------

    \1119\ See, e.g., SIFMA Letter requesting greater flexibility 
for this reason (stating that ``greater flexibility is needed to 
accommodate various business models, given that different firms 
offer different products and services'').
    \1120\ See generally footnotes 76-83 and accompanying text.
    \1121\ See supra footnotes 85-90 and accompanying text.
---------------------------------------------------------------------------

    In a change from the proposed instructions, the final instructions 
encourage rather than require dual registrants and affiliates to 
prepare one single relationship summary, but also allow them to instead 
prepare two separate relationship summaries.\1122\ In addition, if 
firms prepare one combined relationship summary, the final instructions 
required them to employ design elements of their own choosing to 
promote comparability, rather than the two-column format, as prescribed 
in the proposed instructions. This increased flexibility in 
presentation relative to the proposal can benefit dual registrants and 
affiliates because it allows them to design disclosures more suitable 
to their business models. For example, a firm which generally is 
marketing both sides of its business to retail investors may find it 
less costly and/or more beneficial to provide a combined summary. 
However, dual registrants for which either the brokerage or investment 
advisory side of their business is not generally marketed to most 
customers or clients may find it more beneficial to provide two 
separate relationship summaries. If a firm chooses to prepare two 
distinct relationship summaries, it may incur an extra cost of 
preparing the second summary, but we expect firms will only elect to 
prepare two separate summaries if they believe the benefits of separate 
summaries justify such additional preparation costs.
---------------------------------------------------------------------------

    \1122\ See supra Section II.A.5.
---------------------------------------------------------------------------

    Beyond the more general costs discussed above from the prescribed 
formatting and wording requirements, some specific requirements may be 
costly for certain firms. For example, because the relationship summary 
requires information to be organized by standardized headings in a 
prescribed order, some firms may find it difficult to effectively 
present the most salient information specific to their business and 
services. As such, certain firms may incur costs associated with trying 
to fit their business model and other relevant information into the 
standardized headings. This is mitigated by the fact they have 
flexibility to present the required sub-topics of information in the 
order of their choosing within each subtopic and by firms' ability to 
omit irrelevant information. Firms and financial professionals also may 
bear costs in providing additional information to potential or existing 
investors to clarify any information that is salient to their business 
but does not fit into the standardized headings of the relationship 
summary. These costs are mitigated by firms' ability to supplement 
their relationship summaries with cross-references or hyperlinks to 
additional information.
    The page limit for the relationship summary also has potential 
costs, particularly for firms with complex business models, even under 
the increased flexibility provided by the final instructions, because 
they would have to distill the complexity of their business into the 
same space as less complex firms. The use of layered disclosure, 
through mediums such as hyperlinks, will permit firms to provide more 
detailed information that may ameliorate this cost to some extent, 
while still adhering to the formatting requirements of the relationship 
summary.
    Firms will also incur costs associated with the production and 
verification of information in the relationship summary. Although some 
of the information that will be summarized in the relationship summary 
is contained in other disclosures that firms already provide, firms 
will bear the cost of editing this information for the relationship 
summary and cross-referencing or hyperlinking to additional 
information. For example, to the extent that some firms do not already 
have in place a concise description of how fees, costs, conflicts, and 
standards of conduct are potentially connected, that also will allow 
for meeting the relationship summary's space constraints, firms will 
have to expend time and effort to develop an accurate, clear, and 
concise description of these items, written in plain English, for 
insertion into the relationship summary, and cross-referencing or 
hyperlinking to additional information about these items. These costs 
may be larger for broker-dealers than for investment advisers, who can 
directly draw on the disclosures of fees, costs, and conflicts they 
have to provide to retail investors in Part 2 of Form ADV. Also, to the 
extent the costs of developing this section have a fixed component, the 
relative burden of developing this section may be higher for smaller 
firms. On the other hand, smaller firms are likely to have fewer types 
of fees, costs, and conflicts to report compared to larger firms, 
potentially making it less burdensome for them to summarize the 
required information.
    In addition, the relationship summary requires ``conversation 
starters'' as part of each section, and the conversation starters must 
be highlighted through text features to improve their prominence 
relative to other discussion text. Firms will incur costs associated 
with the conversation starters, particularly with respect to 
preparation and training on how financial professionals provide 
accurate and complete responses to the ``conversation starters'' when 
asked. We do not have access to data and information that would allow 
us to estimate these costs to firms, but we expect them to be 
comparatively greater for firms with more complex business, a wider 
range of offered services and products, because training and 
supervision costs for such firms could be more extensive. For firms 
that provide automated investment advisory or brokerage services, those 
firms will incur burdens to prepare answers to each conversation 
starter question and make those available on the firm's website (while 
providing in the relationship summary a means of facilitating access, 
e.g., by providing a hyperlink, to that section or page).\1123\
---------------------------------------------------------------------------

    \1123\ See supra footnote 184.
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    We also anticipate that firms will bear some costs in the 
production of the electronic format as well as other graphical 
elements, such as charts and tables, which may make important 
information more salient to investors. Smaller firms may 
disproportionately incur costs associated with electronic and graphical 
formatting, particularly if they do not have an existing web presence 
or currently produce brochures or other disclosures that make use of 
graphical formatting. However, because the final instructions 
encourage, but do

[[Page 33593]]

not require electronic formatting and graphical, text, and online 
features, firms would only bear these costs if they expected these 
features to provide benefits that justify these costs.
    Finally, there could also be some indirect costs to firms from some 
of the required content in the relationship summary. In particular, 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, firms that affirm they have one or more reportable 
disciplinary events may face a loss in competitiveness compared to 
firms that have no event to report. This can in particular be costly 
for firms that have few or less serious disciplinary events that may be 
overlooked by investors that do not research the nature of the 
disciplinary history in more detail.\1124\ We also recognize larger 
firms might be more likely to incur such competitive costs, because 
larger firms are more likely to have at least one reportable 
disciplinary event than smaller firms. Similarly, holding size 
constant, older firms, by virtue of having a longer business history, 
are more likely to have one or more reportable events than younger 
firms. Although we acknowledge the potential for firms to incur 
competitive costs from having to affirm they have reportable 
disciplinary history, those costs are justified by the potential 
benefits to investors from this disclosure, as discussed above.
---------------------------------------------------------------------------

    \1124\ Commenters raised similar concerns. See supra footnote 
586 and accompanying text.
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(2) Filing, Delivery, and Updating Requirements
    As proposed, the final instructions require firms to file their 
relationship summaries with the Commission and make them available on 
firms' publicly available websites, if they have one. The relationship 
summary must be filed in a text-searchable format with machine-readable 
headings. Further, the final instructions will require investment 
advisers to file their relationship summaries using IARD, as proposed; 
however, the final instructions--in a change from the proposal--will 
require broker-dealers to file through Web CRD[supreg] instead of 
EDGAR. This should reduce overall burdens relative to the proposal as 
broker-dealers already have extensive experience filing on Web 
CRD[supreg], which is more accessible for broker-dealers. As proposed, 
dual registrants will be required to file on two systems. Instead of 
filing on EDGAR and IARD, as proposed, dual registrants will be 
required to file using both Web CRD[supreg] and IARD. We recognize that 
requiring dual registrants to file using both Web CRD[supreg] and IARD 
may be more costly than filing through just one system; however, we 
believe that any such cost is justified to ensure a complete and 
consistent filing record for each firm and to facilitate the 
Commission's data analysis, examinations, and other regulatory efforts.
    As discussed above, the firms that deliver relationship summaries 
electronically must do so within the framework of the existing 
Commission guidance regarding electronic delivery.\1125\ With respect 
to initial delivery of the relationship summary to new or prospective 
investors, firm are required to deliver the relationship summary in a 
manner consistent with how the retail investor requested information, 
consistent with the Commission's electronic delivery guidance.\1126\ 
Flexibility in the method of delivery, consistent with Commission 
guidance, could promote efficiency by allowing firms to communicate 
with retail investors in the same medium by which they typically 
communicate other information.\1127\ Regardless of the method of 
delivery (e.g., paper or electronic delivery), firms will incur costs 
associated with delivering the relationship summary to retail 
investors.
---------------------------------------------------------------------------

    \1125\ See supra Section II.B.3 and footnote 678.
    \1126\ See supra footnotes 679-681 and accompanying text.
    \1127\ See supra Section II.B.3 and footnote 680.
---------------------------------------------------------------------------

    Moreover, requiring firms to make a copy of the relationship 
summary available upon request without charge will require firms to 
incur costs. For example, firms that provide a paper version of the 
relationship summary to retail customers that request it will incur 
printing and mailing costs when such requests are made. Further, firms 
may incur additional costs associated with systems for tracking 
customer delivery preferences.
    Firms will also incur costs for updating and filing the 
relationship summary within 30 days of whenever any information becomes 
materially inaccurate.\1128\ 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, the ability to disclose 
material changes by delivering another required disclosure containing 
the updated information should mitigate the cost of the requirement to 
communicate updated information in the relationship summary to 
investors. Firms could also incur costs to keep records of when the 
initial or updated relationship summary was delivered; however, we 
believe that firms will be able to leverage their current compliance 
infrastructures in maintaining such information.
---------------------------------------------------------------------------

    \1128\ Along this line, firms could also incur some costs in 
modifying certain referenced disclosures per the parameters of 
General Instruction 3.B to Form CRS.
---------------------------------------------------------------------------

    The Commission anticipates that the costs associated with delivery 
for an average broker-dealer or average dual registrant will be higher 
than the costs for the average investment adviser. As Table 1 and Table 
3 in Section IV.A.1 indicate, broker-dealers maintain a larger number 
of accounts than investment advisers; 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 
investors.\1129\ Similarly, given that the average dual registrant has 
more customer accounts than the average investment adviser, and that 
the preparation of relationship summaries and any updates for dual 
registrants may require more effort than for standalone broker-dealers 
or investment advisers, the compliance costs could be larger for those 
firms.
---------------------------------------------------------------------------

    \1129\ 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.
---------------------------------------------------------------------------

    Firms will be required to deliver the relationship summary to 
retail investors. The final instructions have adopted a definition of 
retail investor that is similar to the definition of retail customer in 
Regulation Best Interest, but differs to reflect the differences 
between the relationship summary delivery requirement and the 
obligations of broker-dealers under Regulation Best Interest, including 
that the retail investor definition covers prospective as well as 
existing clients and customers and natural persons who seek services 
from investment advisers as well as broker-dealers. This definition of 
retail investor relative to the proposal may reduce uncertainty for 
broker-dealers and investment advisers about which customers should 
obtain relationship summaries. We do not believe this changes the scope 
of retail investors that will benefit collectively from the final 
rules.

[[Page 33594]]

(3) Recordkeeping Amendments
    As adopted and discussed above, firms will be required to make and 
preserve records of each version of their relationship summary and each 
amendment filed with the Commission. Firms will also be required to 
make and preserve a record of the dates that each relationship summary 
was given to any client, customer, or prospective client or customer 
who subsequently becomes a client or customer and such records will be 
maintained in the same manner, and for the same period of time, as 
other books and records under the applicable recordkeeping rules. As 
previously discussed, commenters stated that they believe the 
requirement to maintain records of the dates that the relationship 
summary was given to prospective clients or customers may impose 
significant and unnecessary costs and burdens.\1130\ Commenters stated 
that firms do not have compliance and recordkeeping systems in place 
that could, without substantial and costly modification, maintain 
records of related to prospective clients or customers who might not 
become actual clients or customers of the firms for weeks, months or 
years after firms begin communicating with such individuals. As an 
alternative, commenters suggested that firms only be required to 
maintain a record of the most recent date they delivered the 
relationship summary to a prospective client that becomes an actual 
client preceding the opening of an account. Commenters suggested only 
requiring a record that the relationship summary was delivered at 
account opening or when a retail investor becomes an investment 
advisory client.
---------------------------------------------------------------------------

    \1130\ See, e.g., Edward Jones Letter.
---------------------------------------------------------------------------

    The inclusion of the recordkeeping requirements in the amended 
rules will impose costs on firms in the form of revised recordkeeping 
policies and procedures and possible modifications to their 
recordkeeping systems. The record requirements, however, may be less 
burdensome if their recordkeeping and compliance systems are already 
capable of creating and maintaining records related to communications 
with prospective clients. For example, investment advisers are required 
to keep similar records for the delivery of the Form ADV Part 2 
brochure and broker-dealers are subject to comparable recordkeeping 
requirements with respect to communications and correspondence with 
prospective retail investors.\1131\ Further, these recordkeeping 
requirements may benefit firms by assisting them in monitoring their 
compliance with the relationship summary delivery requirements. 
Finally, these records will facilitate the Commission's ability to 
inspect for and enforce compliance with the relationship summary 
requirements.
---------------------------------------------------------------------------

    \1131\ See supra footnote 810.
---------------------------------------------------------------------------

(4) Estimates of Certain Compliance Costs
    Although we are unable to quantify all costs discussed above, we 
quantify certain direct compliance costs based on the estimates 
developed for the purpose of the Paperwork Reduction Act analysis in 
Section V. These costs, which we discuss below, are estimated 
separately for investment advisers and broker-dealers that are required 
to prepare and file a relationship summary. We note that all aggregate 
cost estimates for either category of firms include the 318 dually 
registered firms.\1132\ In addition, the costs estimates are calculated 
for the average investment adviser or average broker- dealer. We 
recognize that the actual compliance costs burdens for some firms will 
exceed our estimates and the burden for others will be less because 
firms vary in the size and complexity of their business models.
---------------------------------------------------------------------------

    \1132\ See supra footnote 863 and accompanying text.
---------------------------------------------------------------------------

    First, we quantify certain one-time costs associated with the 
initial preparation and filing of the relationship summary. The cost 
burden for an average investment adviser to initially prepare and file 
the proposed Form CRS for the first time is estimated to range between 
approximately $5,460 and $9,165, depending on the extent to which 
external help is used.\1133\ The estimated aggregate non-amortized 
combined internal and external costs for all current investment 
advisers of initially preparing and filing the relationship summary 
will be approximately $65.3 million.\1134\ In addition, based on IARD 
system data, the Commission estimates that each year approximately 656 
newly investment advisers will be required to prepare and file the 
relationship summary with us.\1135\ The aggregate non-amortized initial 
preparation and filing costs of the relationship summary for these new 
investment advisers is estimated to be approximately $5.2 
million.\1136\ Similarly, for broker-dealers, the cost to an average 
broker-dealer for preparing Form CRS for the first time is estimated to 
range between approximately $10,920 and $14,625.\1137\ We estimate the 
aggregate non-amortized aggregate combined internal and external costs 
to all current broker-dealers of initially preparing and filing the 
relationship summary will be approximately $38.8 million.\1138\ We do 
not expect any new broker-dealer firms based on the secular decline in 
broker-dealer firms we have seen in recent years.\1139\
---------------------------------------------------------------------------

    \1133\ The lower end estimate is based on the assessment that, 
without additional external help, it will take an average investment 
adviser 20 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 $237 and $309 per 
hour, (see infra footnote 1232 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 $5,460 (10 
hours x $237 + 10 hours x $309 = $5,460) 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 $3,705, see infra footnote 1239, which brings the 
total cost to $9,165.
    \1134\ We estimate that the aggregate internal cost of initial 
preparation and filing of the relationship summary for existing 
investment advisers is $44,963,100 (= $5,460 per investment adviser 
x 8,235 existing investment advisers). The aggregate external cost 
for existing investment advisers is estimated to be $20,371,331. See 
infra Sections V.A.2.a and V.A.2.b for more detailed descriptions of 
how we arrived at these estimates.
    \1135\ See infra footnote 1227 and accompanying text.
    \1136\ We estimate that the aggregate internal cost of initial 
preparation and filing of the relationship summary for expected 
newly registered investment advisers is $3,3,581,760 (= $5,460 per 
investment adviser x 656 expected new investment advisers). The 
aggregate external cost for expected new investment advisers is 
estimated to be $1,622,780. See infra Sections V.A.2.a and V.A.2.b 
for more detailed descriptions of how we arrived at these estimates.
    \1137\ The lower end estimate is based on the assessment that, 
without additional external help, it will take an average broker-
dealer 40 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 $237 and $309 per hour, 
respectively (see infra footnote 1365 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 at $10,920 (20 
hours x $237 + 20 hours x $309 = $10,920) 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 $3,705, see infra footnote 1378, which brings the total 
cost to $14,625.
    \1138\ We estimate that the aggregate internal cost of initial 
preparation and filing of the relationship summary for existing 
broker-dealers is $30,204,720 (= $10,920 per broker-dealer x 2,766 
existing broker-dealers). The aggregate external cost for existing 
broker-dealers is estimated to be $8,560,770. See infra Sections 
V.D.2.a and V.D.2.b for more detailed descriptions of how we arrived 
at these estimates.
    \1139\ See infra Section IV.B.c for a discussion of this 
decline.
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    Firms will also incur one-time costs of the initial delivery of 
relationship summaries to their existing retail investors. We expect 
the non-amortized initial delivery costs to be

[[Page 33595]]

approximately $4,941 for the average investment adviser. \1140\ In 
total, we estimate that the aggregate non-amortized initial delivery 
costs to existing retail investors will be approximately $40.7 million 
for all current investment advisers,\1141\ and $3.2 million for newly 
registered investment advisers.\1142\ For the average broker dealer, we 
expect costs for the initial delivery to existing retail investors to 
be approximately $45,801.\1143\ The aggregate non-amortized initial 
delivery cost for all current broker-dealers is estimated to be 
approximately $126.7 million.\1144\
---------------------------------------------------------------------------

    \1140\ See supra Section V.C.2.b.(1) for a description of how 
this is estimated.
    \1141\ Calculated as $4,941 per firm x 8,235 current firms = 
$40,689,135.
    \1142\ Calculated as $4,941 per firm x 656 expected new firms = 
$3,241,296.
    \1143\ Calculated as $126,684,600 (the estimated aggregate 
costs)/2,766 (number of broker-dealers with retail customers). See 
infra Section V.D.2.d. (1) for how the aggregate cost is estimated.
    \1144\ Id.
---------------------------------------------------------------------------

    Moreover, firms are required to post a current version of their 
relationship summary prominently on their public website (if they have 
one). We estimate that the initial posting will cost approximately $93 
per firm (whether an investment adviser or a broker-dealer).\1145\ In 
aggregate we expect the initial cost of posting the relationship 
summary to firms' websites to be approximately $686,437 for existing 
investment advisers,\1146\ $54,682 for newly registered investment 
advisers,\1147\ and $257,238 for broker-dealers.\1148\
---------------------------------------------------------------------------

    \1145\ See infra sections V.C.2.a (for investment advisers) and 
V.D.2.a (for broker-dealers) for how the average cost per firm is 
estimated.
    \1146\ Based on IARD system data, 91.6% of investment advisers 
with individual clients report having at least one public website; 
see infra Section IV.B.2.a. Therefore the aggregate cost for 
existing investment advisers is estimated as: 91.6% x $91(average 
cost per firm) x 8,235 (number of existing investment advisers) = 
$686,437.
    \1147\ Assuming that the fraction of firms with at least one 
public website is the same for newly registered investment advisers 
as it is for existing investment advisers (see id), we estimate the 
aggregate costs as: 91.6% x $91(average cost per firm) x 8,235 
(excepted number of new investment advisers) = $54,682.
    \1148\ See infra footnote 1370 and accompanying text.
---------------------------------------------------------------------------

    In addition to the estimates of one-time costs discussed above, for 
the purposes of the Paperwork Reduction Act analysis, we have also 
developed estimates of certain expected ongoing compliance costs of the 
final rules. For example, firms will incur costs each year due to the 
requirement to re-deliver the relationship summary to existing retail 
investors in certain situations. We estimate that the annual average 
cost to re-deliver the relationship summary will be approximately $992 
for an average investment adviser and in aggregate approximately $8.8 
million annually for all investment advisers.\1149\ For broker-dealers, 
we estimate that the annual average cost to re-deliver the relationship 
summary will be approximately $9,222 for the average firm, and in 
aggregate approximately $25.5 million annually for all broker-
dealers.\1150\ Firms will also be required to deliver relationship 
summaries to new and prospective retail investors. Based on the 
Commission's projections of future client and customer account growth, 
we estimate that the annual costs to current firms of delivery to new 
and prospective retail investors would be between approximately $223 
for an average investment adviser and $5,072 for an average broker-
dealer, or approximately $1.8 million annually in aggregate for 
investment advisers and approximately $14.0 million annually in 
aggregate for broker-dealers.\1151\ The difference in cost estimates 
between investment advisers and broker-dealers is mainly due to the 
fact that investment advisers serving retail investors generally have 
fewer clients than broker-dealers serving retail investors have 
customer accounts, but also because we project a lower growth rate for 
retail clients for investment advisers (4.5%) \1152\ than for retail 
customer accounts for broker-dealers (11.0%).\1153\ In addition, firms 
will also incur costs associated with making paper copies of the 
relationship summary available upon request. We estimate that such 
annual costs would be approximately $31 for the average firm (whether 
investment adviser or broker-dealer), and the aggregate annual costs 
for investment advisers and broker-dealers combined would be 
approximately $338,272.\1154\
---------------------------------------------------------------------------

    \1149\ See infra Section V.C.2.b.(2).
    \1150\ See infra Section V.D.2.d.(2).
    \1151\ See infra section V.C.2.c for how we estimate the costs 
to investment advisers, and see infra Section V.D.2.e for how we 
estimate the costs for broker-dealers.
    \1152\ See infra footnote 1341 and accompanying text.
    \1153\ See infra footnote 1415 and accompanying text.
    \1154\ See infra footnote 1339 and accompanying text for how we 
estimate the costs for investment advisers, and see infra footnote 
1413 and accompanying text for how we estimate the costs for broker-
dealers.
---------------------------------------------------------------------------

    In Section V, for the purposes of the Paperwork Reduction Act 
analysis, we also estimate the quantifiable expected ongoing costs 
associated with updating the relationship summary. These costs would be 
associated with preparing updated relationship summaries when 
information becomes materially inaccurate, re-posting updated 
relationship summaries to a public website, and communicating changes 
to the relationship summary through re-delivery to existing retail 
investors. We estimate that the annual costs for firms to update and 
file amended relationship summaries will be approximately $467 for the 
average investment adviser, or approximately $3.8 million in aggregate 
for all investment advisers.\1155\ For investment advisers with a 
public website, we estimate the average annual costs of re-posting 
amended relationship summaries to be approximately $53.32 per adviser, 
or $402,207 in aggregate for all investment advisers with public 
websites.\1156\ Finally, we expect investment advisers will incur 
quantifiable costs of communicating changes to amended relationship 
summaries, if they choose to do so by delivery. We estimate the average 
annual costs of communicating changes to amended relationship summaries 
by delivery will be $8,450 per adviser that to choose to do so, and in 
aggregate approximately $34.8 million for all investment advisers that 
we expect to choose delivery to communicate updated information.\1157\ 
For broker-dealers, we estimate the annual costs to update, file, and 
post amended relationship summaries will be approximately $608 for the 
average firm and approximately $1.7 million in aggregate for all 
broker-dealers.\1158\ We estimate annual delivery costs will be 
approximately $ 91,602 for the average broker-dealer that will choose 
delivery to communicate updated information, and in aggregate 
approximately $126.7 million annually for all broker-dealers that we 
expect to choose delivery.\1159\
---------------------------------------------------------------------------

    \1155\ See infra Section V.A.2.c for how we estimate these 
costs.
    \1156\ See infra Section V.C.2.b.(3) for how we estimate these 
costs.
    \1157\ Id.
    \1158\ See infra Section V.D.2.c for how we estimate these 
costs.
    \1159\ See infra Section V.D.2.d.(3) for how we estimate these 
costs.
---------------------------------------------------------------------------

    Finally, for the purposes of the Paperwork Reduction Act analysis, 
we also developed estimates of certain compliance costs associated with 
the recordkeeping requirements in the final rules. We estimate that the 
annual costs to firms related to these recordkeeping requirements will 
be $12.67 for an average investment adviser and approximately $104,354 
in aggregate for all investment advisers. \1160\ For broker-

[[Page 33596]]

dealers, we estimate annual recordkeeping and record retention costs to 
be approximately $39 for an average broker-dealer, and $107,017 in 
aggregate for all broker-dealers.\1161\
---------------------------------------------------------------------------

    \1160\ For investment advisers we estimate 0.2 additional burden 
hours related to the recordkeeping requirements in the final rule; 
see infra footnote 1280 and accompanying text. We expect that this 
incremental burden will most likely be allocated between compliance 
clerks and general clerks, with compliance clerks performing 17% of 
the function at a total cost of $70 per hours, and general clerks 
performing 83% of the function at total cost of $62 per hour; see 
infra footnote 1282. The average costs per investment adviser is 
then estimated as (17% x 0.2 hours x $70) + (83% x 0.2 hours x $62) 
= $12.672. The aggregate cost is then $12.672 x 8,235 (number of 
investment advisers) = $104,354.
    \1161\ See infra Section V.E for the estimation of recordkeeping 
costs (estimated at $32 annually per broker-dealer, or $87,627 in 
aggregate), and see infra section V.F.1 for the estimation of record 
retention costs (estimated at $7 annually per broker-dealer, or 
$19,390 in aggregate).
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3. Impact on Efficiency, Competition, and Capital Formation
    In addition to the specific benefits and costs discussed in the 
previous section, we expect that the relationship summary could produce 
a number of broader long-term effects on the market for financial 
advice. Below, we elaborate on these potential effects, in particular 
as they pertain to their impact on efficiency, competition, and capital 
formation.
a. Efficiency
    The final rule requiring broker-dealers, investment advisers, and 
dually registered firms to produce a relationship summary could result 
in increased informational or allocative efficiency for retail 
investors by reducing the risk of matching with a firm or financial 
professional that is different from the investor's expectations and 
preferences. As discussed above, the risk of mismatch potentially 
imposes costs on investors, financial professionals, and firms. 
Investors may inadvertently, in the absence of information provided by 
the relationship summary, select the wrong type of financial 
professional or account, leading to increased costs (direct and 
indirect) and potentially suboptimal outcomes as it pertains to meeting 
the investor's financial goals. For firms and financial professionals, 
cultivating relationships with potential investors requires resources 
in terms of time and effort. If an investor and financial professional 
or firm is mismatched, then both sides of the relationship can incur 
costs. For example, the financial professional may devote time and 
resources to develop a relationship with a retail investor that is 
comparatively costly to maintain because of a mismatch between the 
investor's expectations and the services offered by the 
professional,\1162\ and the investor incurs costs associated with 
obtaining services that do not fit his or her needs. As such, the 
relationship summary may reduce the costs associated with mismatch for 
investors, firms, and financial professionals and increase the 
efficiency of the market for financial advice. We expect these 
efficiency gains particularly in the initial matching between investors 
and firms and financial professionals. For some retail investors, 
receipt of the relationship summary from their existing firm or 
financial professional could highlight that they are mismatched in 
their current relationship. Those investors may benefit from 
terminating the mismatched relationship and looking for a more 
appropriate match, but such gains are likely to only be realized to the 
extent investors anticipate the long-term benefits from a better match 
will be greater that the short-run switching and search costs. 
Moreover, these efficiency benefits may be attenuated to the extent 
that investors tend to stay in relationships with financial 
professionals once investors are committed to the relationship, even if 
the relationship is mismatched.
---------------------------------------------------------------------------

    \1162\ However, as discussed previously in, e.g., supra Section 
IV.B, a mismatch from the retail investors' perspective may be 
advantageous for firms in certain circumstances, in which case firms 
may not overall benefit from a decrease in the number of mismatched 
investors.
---------------------------------------------------------------------------

    Informational efficiencies could also be enhanced with the 
relationship summary because key information is focused on information 
that has been previously identified as important to retail investors, 
salient and consistently disclosed across broker-dealers and investment 
advisers. The relationship summary will provide concise, user-friendly 
information which will allow retail investors to better understand the 
relationship that they will have with their financial professionals and 
will allow them to seek services commensurate with their expectations. 
In addition, to the extent the information asymmetry between investors 
and financial professionals is reduced, investors may make more 
informed investment decisions, or become more able to critically 
evaluate any investment advice they receive. Further, the use of 
layered disclosure and conversation starters will allow retail 
investors to access additional information that may be relevant to them 
when selecting their firm or financial professional, further reducing 
the risk of mismatch.
    The firm-specific nature of the relationship summary required by 
the final rules about a particular firm will enhance retail investors' 
information set about each firm, providing them with a more concise and 
simple document, which should alleviate potential investor confusion 
about the key elements of the relationship that the investor could 
expect to have with that firm.
    However, such improved efficiency could be lower than that expected 
under the proposal because, unlike the proposed relationship summary, 
the adopted relationship summary will include less prescribed language 
and greater flexibility. For example, the relationship summary will not 
include a comparison between general broker-dealer and investment 
adviser standards and services.\1163\ The elimination of this proposed 
requirement will likely reduce (relative to the proposal) the 
usefulness to retail investors from obtaining this general information 
from a single source (e.g., any firm's relationship summary) and 
instead will require effort from investors in the form of search costs 
to provide an adequate comparison across firms within a given type of 
firm (e.g., investment advisers). Moreover, for investors that may not 
know which type of firm is likely to best meet their preferences and 
expectations with respect to financial services, a less general 
relationship summary requires that investors that expend search costs 
also select the correct types of firms in order to make such a 
comparison. This may be difficult for some retail investors, and could 
increase the costs of search and the risk of mismatch. Also, allowing 
dual registrants the flexibility to prepare two separate relationship 
summaries rather than one combined document may result in some 
efficiency loss in terms of less direct comparability. Nonetheless, we 
believe that investors having access to specific and tailored 
information about the firms, as provided in the final rules, is more 
important for reducing investors search costs and risk of mismatch, 
thereby justifying the potential efficiency losses (relative to the 
proposal) discussed above.
---------------------------------------------------------------------------

    \1163\ See supra Section II.B.6 for why the generalized 
comparison discussion was not included in the relationship summary.
---------------------------------------------------------------------------

    Beyond informational efficiencies that could arise, the 
relationship summary also may lead to more efficient investor 
allocation of assets within their portfolios relative to the baseline. 
Some retail investors that previously avoided the market for financial 
services because they did not understand the material characteristics 
of either broker-dealers or investment advisers may be more

[[Page 33597]]

likely to hire a financial professional if the costs associated with 
the acquisition of this information are reduced relative to the 
baseline. The relationship summary is a simple, concise document 
providing investors information about key elements of the investor-
provider relationship that could incent some investors to seek the 
services of a financial professional. As such, for some investors that 
previously abstained from hiring a financial professional, portfolio 
efficiency could be improved, for example, through increased portfolio 
diversification.\1164\ Furthermore, because of being provided the 
relationship summary, some current investors may realize that other 
services provided by their financial professional could be more 
appropriate for them. For example, an advisory client of a dual 
registrant may learn more about the broker-dealer services offered by 
the firm and realize that those services better match his or her 
preferences and make a switch, which may ultimately improve portfolio 
efficiency for the client.
---------------------------------------------------------------------------

    \1164\ As discussed above, academic studies have identified 
several potential benefits to retail investors from seeking 
investment advice, including increased diversification; see supra 
footnote 1005 and accompanying text.
---------------------------------------------------------------------------

    However, as noted in Regulation Best Interest, certain studies 
suggest that for some financial professionals, the improvements to 
portfolio efficiency could be limited if the financial professionals 
are subject to the same behavioral biases, such as limited attention or 
anchoring, as retail investors in their portfolio allocation 
decisions.\1165\ Further, to the extent the relationship summary makes 
the conflicts of interest of financial professionals more salient to 
retail investors relative to the baseline, there is a risk that some 
professionals would feel they have a ``moral license'' to act on their 
conflicts,\1166\ which could harm the efficiency of retail investors' 
portfolio allocations. Despite such potential negative effects related 
to conflicts of interest disclosure, we believe that, on balance, 
retail investors will benefit from the inclusion of this disclosure in 
the relationship summary. In particular, the conflicts of interest 
disclosure should enhance investors' ability to evaluate which 
relationship is best for them and also help them more critically 
evaluate the recommendations or investment advice they receive, which 
should ultimately improve the efficiency of their portfolio 
allocations.
---------------------------------------------------------------------------

    \1165\ See Regulation Best Interest, Section III.B.3.b.
    \1166\ See supra footnote 1027 and accompanying text.
---------------------------------------------------------------------------

    In addition, and in a modification from the Proposing Release, the 
headings on the relationship summary will be machine readable, which 
will facilitate third-party data aggregators', as well as the 
Commission's, analysis and comparison of certain elements of the 
relationship summary across firms to the benefit of retail investors. 
Comparability will lead to greater informational efficiency because 
retail investors will be better able to choose the right type of firm 
or financial professional and the right type of account and services, 
thereby increasing the likelihood that they choose what best meets 
their needs and reduces the likelihood of mismatch. Providers may 
likewise benefit from higher information acquisition efficiency because 
firms may be more likely to initially attract retail investors who 
prefer their services, thereby potentially reducing customer 
acquisition costs, such as time and effort spent on initial engagement 
with prospective customers who ultimately do not contract for their 
services.
b. Competition
    Beyond increased efficiency for retail investors, the relationship 
summary may also increase competition among broker-dealers and 
investment advisers. Provision of the relationship summary by firms 
could enhance the competitiveness of broker-dealers and investment 
advisers by allowing retail investors to better evaluate and compare 
firms and financial professionals through increased transparency, and 
more generally increase retail investors' understanding of the market 
for brokerage and investment advisory services. In particular, 
increased transparency may allow investors to better assess the types 
of services available and the types of fees and costs associated with 
such services. Moreover, and as discussed above, the relationship 
summary may facilitate comparisons across firms and lead to reduced 
search costs for retail investors, allowing investors to match their 
preferences and expectations for certain financial services, possibly 
at lower costs relative to the baseline, and may increase 
competitiveness between firms to lower prices for some services. We 
believe the changes made to the relationship summary in the final rules 
have potentially strengthened such competitive effects, for example, by 
using less prescribed general language and instead requiring disclosure 
of firm-specific information about services, fees, costs, and 
conflicts, and by making the headings machine readable, which may 
encourage the development of search tools by third party providers. An 
increase in competition may apply only between like firms (i.e., 
broker-dealers only or investment advisers only) or may have intra-
industry effects across broker-dealers and investment advisers.
    As discussed above, increased competition both among and between 
broker-dealers and investment advisers could reduce the pricing power 
of firms, benefitting investors through lower fees. Lower fees could 
draw more retail investors that are not currently seeking investment 
advice to the market, although some retail investors may be willing to 
pay higher prices for other reasons, including enhanced services and 
firm reputation. Combined with improved informational efficiency, 
increased competition for retail investors resulting from information 
provided by the relationship summary may drive prices at the margin to 
competitive levels across all types of firms, depending on how price 
sensitive retail investors are. Alternatively, and similar to what we 
have today, a separating equilibrium may result where investors' demand 
for particular services is relatively price insensitive and they cannot 
be persuaded to move to a different level of service simply because of 
lower prices (e.g., investors seeking ongoing advice may be more likely 
to pay higher prices for advisory services provided by investment 
advisers, even though a potentially lower cost option could be 
available through broker-dealers).
    Further, lower costs of information acquisition and processing due 
to the content, format, and structure of the relationship summary may 
lead to more people entering the market for brokerage and investment 
advisory services and may increase overall retail investor 
participation. Such an increase in the number of retail investors in 
the market for financial services could raise demand for brokerage and 
investments advisory services and mitigate the potential increase in 
competition discussed above. However, increased levels of retail 
investor participation could also encourage new broker-dealer and 
investment adviser entrants to meet the needs of the new pool of 
investors, and may increase competition for investor capital through 
lower fees and costs.
    How the competitive landscape will shift as a result of the 
relationship summary is difficult to determine and the effect on 
aggregate level of competition among and between broker-dealers and 
investment advisers could be limited. For example, the relationship 
summary may not necessarily increase the number of new broker-dealer or 
investment adviser

[[Page 33598]]

entrants to the market, but could lead to shifts of investors between 
broker-dealers and investment advisers to the extent that some 
currently engaged retail investors are mismatched, and that search and 
switching costs associated with correcting the mismatch do not justify 
the costs associated with the potential mismatch. Moreover, the 
incidence of mismatched relationships with retail investors could be 
likely for both broker-dealers and investment advisers, so competition 
could be relatively unaffected in the aggregate; therefore, any 
mismatch corrected as a result of the relationship summary may not 
result in a significant net loss of investors for either broker-dealers 
or investment advisers. In addition, to the extent currently mismatched 
investors are customers of dual registrants, any switch in account type 
(brokerage or investment advisory), as a result of the relationship 
summary, may take place within a dual registrant rather than between 
different firms, further attenuating any competitive impact.
    By reporting legal or disciplinary history, the relationship 
summary may provide benefits to retail investors by prompting them to 
seek out additional information (e.g., from Investor.gov or 
BrokerCheck) on their current or prospective firms and financial 
professionals and take that information into account when considering 
whom to engage for financial services. Competition between firms may be 
enhanced if firms and financial professionals with better disciplinary 
records drive out those with worse records. We note, however, that 
legal and disciplinary history reported in the relationship summary may 
bias firms towards hiring financial professionals with fewer years of 
experience (i.e., fewer opportunities for customer complaints) and 
against hiring experienced financial professional with some (minor) 
complaints. Further, investors may also bias their choice of firm or 
financial professional in the same manner. One commenter stated that 
reporting of legal and disciplinary history ``imposes an inappropriate 
competitive imbalance and inaccurate picture concerning the relative 
number of disciplinary actions in sales organizations with large number 
of financial professionals.'' \1167\ The expected economic impact of 
disciplinary reporting on competition across large and small firms, 
however, is generally unclear because small firms may suffer 
disproportional reputational penalties from more salient disciplinary 
history disclosure. In general, reportable disciplinary history is less 
common for smaller firms than for larger firms.\1168\ Thus, small firms 
may appear to have better disciplinary history reputation than large 
firms solely because of their size of operations, rather than their 
actual legal and regulatory compliance or the professional ethics or 
integrity of their employees. At the same time, investors may over-
react to generally more frequent disciplinary history disclosure by 
larger firms and forego potentially well-matched relationship with the 
larger firms as a result.
---------------------------------------------------------------------------

    \1167\ See ACLI Letter.
    \1168\ For example, while only 36% of registered investment 
advisers with less than $1 million of AUM disclose at least one 
disciplinary action as of January 1, 2019, 71% of registered 
investment advisers with more than $50 billion of AUM disclosed at 
least one disciplinary action that year. Form ADV. Similarly, while 
42% of broker-dealers with less than $1 million in total assets 
disclose at least one disciplinary action as of January 1, 2019, 
100% of broker-dealers with more than $50 billion total assets 
disclosed at least one disciplinary action that year. Form BD.
---------------------------------------------------------------------------

    Disclosing reportable legal and disciplinary history in the 
relationship summary may confer a small competitive advantage for 
investment advisers over broker-dealers because broker-dealers are more 
likely to have to report that they have a disciplinary history due to 
broader broker-dealer disclosure obligations. Reporting from Form BD 
with respect to broker-dealer disclosures of disciplinary actions taken 
by any regulatory agency or SRO show than 308 (86%) out of 318 retail-
facing dual-registered broker-dealers disclosed a disciplinary action. 
In contrast, 1,330 (54%) out of 2,448 retail-facing standalone broker-
dealers disclosed a disciplinary action. For investment advisers, Form 
ADV requires disclosure of any disciplinary actions taken in the past 
10 years, and 284 (79%) of 318 retail-facing dual-registered investment 
advisers disclosed a disciplinary action. However, for standalone 
investment advisers, only 1,176 (15%) of 7,917 retail-facing investment 
advisers disclosed a disciplinary action.\1169\ As broker-dealers have 
relatively more reportable legal and disciplinary history than 
investment advisers, retail investors may engage investment advisers 
with greater frequency than broker-dealers as a result of the 
disciplinary history reporting on the relationship summary, potentially 
creating a competitive advantage for some investment advisers.
---------------------------------------------------------------------------

    \1169\ 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) have imposed upon it 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 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 
rule changes such as investment advisers not registered with the SEC 
(e.g., state registered investment advisers), bank trust departments, 
insurance companies, 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, this 
could attract new retail investors to the broker-dealer and investment 
adviser markets from firms in other markets. At the same time, it is 
possible that, as a result of conflicts of interest and the existence 
of disciplinary history being saliently disclosed in the relationship 
summary, some investors may be deterred from seeking services of 
registered investment advisers or broker-dealers and instead seek the 
services provided by a state registered advisor or another professional 
not regulated by the Commission, or forego seeking financial services 
altogether.
    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 types of fees and costs of investment 
advisory and brokerage services more prominent. Such a switch could be 
within the market for investment advisory and brokerage services, or to 
a financial services provider outside this market (such as a bank or 
insurance company). The information disclosed in the relationship 
summary may also lead some investors to realize a relationship with any 
financial services provider may not be in their best interest, and 
therefore withdraw altogether from the market. The exact extent and 
direction of substitution among different types of providers' 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, and the extent to which 
investors will digest and use the provided information in firms' 
relationship summaries.

[[Page 33599]]

    To the extent the relationship summary increases competition 
between broker-dealers and investment advisers, and between these firms 
and other financial services providers, it may result in development of 
new products and services, and general innovation by the industry at 
large. Competition among firms could provide incentives for firms to 
seek alternative ways to attract retail investors and generate profits. 
In the process, firms could develop new and better ways of providing 
services to retail investors, for example, by utilizing information 
technology to deliver information to retail investors at lower costs. 
In this way, innovation could improve retail investors' welfare as well 
as the profitability of financial service providers.
    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 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.\1170\ 
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. To the extent the 
relationship summary increases the transparency and salience of such 
selling concessions and related conflicts of interest, investors may 
start to avoid investing in products that provide selling concessions, 
encouraging broker-dealers to avoid such arrangements. To compensate 
for the potential loss of concession-based revenue, dually registered 
firms could try to switch customers from their brokerage account to 
their advisory accounts. As noted above, however, if the relationship 
summary also increases the competitiveness in the broker-dealer and 
investment adviser markets, the increased competitiveness would create 
some general downward price pressure in the market which may spillover 
to selling concessions.
---------------------------------------------------------------------------

    \1170\ See supra Table 2, Section IV.B.1.a.
---------------------------------------------------------------------------

c. Capital Formation
    As discussed above, the relationship summary may improve retail 
investors' understanding about, and confidence in, the market for 
brokerage and investment advisory services, which may increase 
participation in this market by investors that previously avoided it. 
Such additional entry by new investors could increase the level of 
total capital across markets and increase the demand for new investment 
products and securities, which could precipitate capital formation in 
aggregate across the economy. Depending on the magnitude of these 
effects, the increased availability of funds could result in lower cost 
of capital for companies, which could facilitate economic growth.
    However, to the extent the disclosure of certain information such 
as conflicts of interest or disciplinary history decreases some retail 
investors' level of confidence in market for brokerage and investment 
advisory services, or the information provided makes some investors 
believe that they do not benefit from a relationship with a firm or 
financial professional, such investors could exit this market, which 
could attenuate any effects on capital formation. In addition, to the 
extent that the market for financial services is already saturated, 
there may only be a redistribution between broker-dealers, investment 
advisers, and other financial service providers (such as state-
registered investment advisers, banks, and insurance companies) as a 
result of retail investors becoming more informed, and any effects on 
capital formation would be attenuated.
4. Alternatives to the Relationship Summary
    To reduce retail investor search costs and costs of potential 
mismatch between retail investors and professionals in brokerage and 
investment advisory services, we considered various alternative 
approaches to the relationship summary, including whether to adopt 
additional disclosure requirements. We have previously learned through 
public comments, investor testing, and a staff financial literacy study 
that industry commenters and survey participants generally supported a 
short disclosure document to retail investors that would address firms' 
nature and scope of services, fees, and material conflicts of 
interest.\1171\ Accordingly, we proposed rules and rule amendments to 
require firms to provide retail investors with disclosures designed for 
those purposes. In our proposal, we solicited comment on alternatives 
to various elements of the relationship summary. As discussed in 
Section I above, we also conducted extensive public outreach, including 
investor roundtables, specific solicitation of investor comments 
through the Feedback Forms, and investor testing.\1172\ We considered 
the suggestions and recommendations received through these processes as 
alternative approaches in our rulemaking, many of which we discussed in 
greater detail in Sections I and II above. In determining the required 
scope and level of detail of information in the relationship summary, 
we balanced the need for robust disclosures with the risk of investor 
information overload and failure to properly process these disclosures, 
a recurring theme in both comment letters and investor feedback 
received through surveys and studies, roundtables and on Feedback 
Forms.
---------------------------------------------------------------------------

    \1171\ See Proposing Release, supra footnote 5, at nn.13-21 and 
accompanying text.
    \1172\ See supra footnotes 11-21 and accompanying text.
---------------------------------------------------------------------------

a. Amending Existing Disclosures
    The relationship summary will be a new, separate disclosure, in 
addition to other disclosures that firms already must provide.\1173\ As 
noted in Section I above, some commenters argued that the relationship 
summary is duplicative of other disclosures, for example in Form ADV or 
in Form BD, and is thus unnecessary.\1174\ The Commission considered 
amending Part 2A of Form ADV to require a brief summary at the 
beginning of the brochure in addition to the existing narrative 
elements, or changing certain existing Part 2A requirements to reduce 
or eliminate redundancy with parts of the relationship summary. 
Similarly, the Commission considered whether to amend and require 
delivery to retail investors of a revised Form BD to include the same 
information as in the relationship summary, and make that information 
publicly available.\1175\
---------------------------------------------------------------------------

    \1173\ Broker-dealers and investment advisers have disclosure 
and reporting obligations under state and federal laws, 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 SROs.
    \1174\ See supra footnote 33 and accompanying text.
    \1175\ 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.
---------------------------------------------------------------------------

    After careful consideration and for the reasons discussed in 
Section I above, we believe that a separate summary disclosure will be 
more effective to help retail investors to choose from among firms and 
investment services than modifying existing disclosures.\1176\ We 
believe that a short, standalone relationship summary that facilitates 
comparisons across different providers

[[Page 33600]]

and types of services is necessary to highlight information that is 
relevant to a retail investor before or at the time she is deciding to 
select a firm, financial professional, account type, or services. To 
that end, the short and succinct relationship summary includes topics 
that retail investors indicated would be important to them in selecting 
a provider. Specifically, because the relationship summary is a shorter 
document and designed to be more of an overview than the existing 
investor-facing disclosures, such as Form ADV, and is specifically 
targeted to help retail investors obtain certain information before 
deciding to enter into a relationship with a financial professional, 
retail investors facing that decision can process its information 
content more efficiently. The relationship summary facilitates layered 
disclosures and highlights where investors can access more detailed 
information, including existing documents that investors receive, which 
could facilitate review of those documents, such as Form ADV Part 2. 
The relationship summary also promotes the investor receiving more 
detailed information about the provider and its services, as necessary, 
through conversation starters. Furthermore, when compared to other 
disclosures that financial professionals may make on, for example, Form 
ADV and Form BD, the relationship summary seeks to enhance 
comparability across both adviser and broker-dealer provider types for 
retail investors.
---------------------------------------------------------------------------

    \1176\ See supra footnotes 42-44 and accompanying text.
---------------------------------------------------------------------------

    Thus, despite some content duplication with other existing 
disclosure requirements and firms having to bear the cost of creating 
additional disclosures, we believe that retail investors will benefit 
from having information relevant to deciding on a firm, financial 
professional, and/or accounts and services in one place in a more 
succinct, salient and standardized fashion. Overall, we believe that 
the relationship summary will enable better-informed decision-making, 
reduce risk of mismatch, and reduced search costs by retail investors.
b. Form and Format of the Relationship Summary
    Under the final instructions, firms will be required to describe, 
largely in their own wording, different topics related to their 
offerings in a question-and-answer format. In comparison, we proposed 
instructions providing for standardized, declarative headings for each 
section of the relationship summary and a mix of prescribed and firm-
specific language within each section. As discussed in Section I above, 
nearly all commenters and investors providing feedback at roundtables 
and on Feedback Forms suggested modifications to the sample 
relationship summary and proposed instructions, and numerous commenters 
submitted alternative sample relationship summaries.\1177\
---------------------------------------------------------------------------

    \1177\ See supra footnotes 36-40 and accompanying text.
---------------------------------------------------------------------------

    Delivery of SEC-authored form. Commenters suggested that the SEC 
author a standard industry-wide disclosure to deliver to retail 
investors, which could then be supplemented by firm-specific 
documents.\1178\ For example, one commenter suggested using as a 
potential framework the Buyers Guides developed by the National 
Association of Insurance Commissioners that insurance companies must 
deliver under certain circumstances.\1179\ Commenters supporting an 
SEC-authored educational layer believed that the SEC was better placed 
than firms to discuss areas viewed to be educational in nature, such as 
comparisons, standard of conduct, and key questions to ask.
---------------------------------------------------------------------------

    \1178\ Primerica Letter.
    \1179\ ACLI Letter.
---------------------------------------------------------------------------

    We have incorporated an element of these commenters' suggestion by 
removing the comparisons section, which many commenters viewed as 
educational, and adding a link at the beginning of the relationship 
summary to Investor.gov/CRS where investors can obtain educational 
materials. However, we believe that investors are better served by 
keeping certain disclosures that may be viewed as more educational in 
nature, such as the standard of conduct and some of the ``conversation 
starters'' (replacing the ``Key Questions to Ask''), in the 
relationship summary. We believe investors are more likely to 
understand how such content will affect them when presented in the 
context of the particular firm.
Level of Flexibility in the Disclosure
    As discussed in more detail above, we considered the appropriate 
level of prescribed wording and topics in the disclosure. Several 
commenters suggested that, as an alternative to the prescriptive 
wording in the proposed relationship summary, we provide firms with 
more flexibility to craft their responses to items, with or without an 
SEC standardized disclosure to accompany the relationship summary or 
available on Investor.gov. We considered the relative merits of 
prescribed wording and formatting versus allowing firms to use their 
own, as well as a mix of prescribed requirements and discretionary 
choices. We considered this for different topics and sub-topics in the 
relationship summary, as well as for the relationship summary overall. 
In some instances, we determined that prescribed wording would provide 
targeted benefits that discretionary wording could not, for example, 
through the use of standardized headings and a prescribed order of 
topics in order to maintain the benefits of comparability and utility 
for retail investors.\1180\ For the reasons discussed in Section II, 
above, we also determined to prescribe wording for conversation 
starters, the standard of conduct, and a factual statement regarding 
the effect of fees over time. In the event that prescribed wording is 
inapplicable to a firm's business or inaccurate, the firm may omit or 
modify that wording. We believe that this approach will allow firms 
greater flexibility to tailor their relationship summary disclosures to 
reflect their offerings more closely and accurately. However, greater 
flexibility in terms of wording could also allow firms to present 
disclosures in a more advantageous manner to them, rather than in a 
manner that would maximize the benefits to investors from the 
disclosures. Nonetheless, we believe retail investors will benefit 
under this adopted approach by receiving disclosures that may be more 
understandable, and also more informative about a particular firms' 
offerings that they are considering.
---------------------------------------------------------------------------

    \1180\ See supra Section II.A.1.
---------------------------------------------------------------------------

c. Summary of Fees, Costs, Conflicts, and Standard of Conduct
    In response to comments and investor feedback through surveys and 
studies, roundtable and the Feedback Forms, we are adopting changes 
from the proposal to the relationship summary's required discussion of 
fees, costs, conflicts of interest, and standard of conduct, as 
described above.\1181\
---------------------------------------------------------------------------

    \1181\ See supra Section II.B.3.
---------------------------------------------------------------------------

    In connection with fee disclosure, the Commission considered many 
alternative approaches relating to the scope and types of fees firms 
must include in their relationship summaries, as well as the 
presentation of the fee disclosure.\1182\ As discussed in Section 
II.A.4 above, commenters' views varied on the scope and types of fees 
that should be disclosed and their level of

[[Page 33601]]

detail.\1183\ In addition to what we had proposed and what we have 
adopted, the Commission considered other alternatives, such as whether 
to require firms to list all fees that retail investors may incur, to 
allow firms the flexibility to determine what fees to highlight, and 
variations or combinations of these approaches. The final approach is 
designed to balance the need to provide a comprehensive view of what 
fees retail investors will pay with the need to produce relevant, 
succinct and understandable disclosures. The final instructions do not 
require firms to disclose every single fee and instead permit firms to 
highlight examples of the categories of the most common fees that their 
retail investors will pay directly or indirectly.\1184\ We believe this 
approach benefits retail investors because they will be able to compare 
fee information that is more closely tailored to firms' particular 
business practices, but also reflective of common fees that retail 
investors are likely to incur.
---------------------------------------------------------------------------

    \1182\ See supra Section II.A.4. In addition, the Commission 
considered alternative approaches with respect to the disclosure 
regarding a firm's conflicts of interest and standard of conduct. A 
discussion of the Commission's consideration may be found in Section 
II.A.4.
    \1183\ See supra footnotes 420-423 and accompanying text.
    \1184\ See Item 3.A. of Form CRS.
---------------------------------------------------------------------------

    The Commission also considered alternative ways in which firms 
should present their fees, such as whether to require firms to link to 
or include a fee schedule directly in the relationship summary,\1185\ 
or to require firms to include a hypothetical fee example.\1186\ Under 
the final instructions, firms must summarize their principal fees and 
costs and other fees and also include specific cross-references to more 
detailed information about their fees available in other sources.\1187\ 
The Proposing Release discussed the option of including an example of 
the impact of fees in the relationship summary.\1188\ While some 
commenters supported the inclusion of various forms of additional 
examples of fees calculations,\1189\ after careful consideration of the 
comment file and investor feedback received through studies and 
surveys, roundtables and Feedback Forms, we are declining to include a 
hypothetical fee example in the relationship summary. We do so in light 
of commenters who suggested that such an example could be operationally 
difficult to implement, and that it could be perceived as 
confusing.\1190\ Specifically, we believe the assumptions required to 
make a fee example relevant for investors vary for individual investors 
to the extent that a standardized example risks increasing investor 
confusion.
---------------------------------------------------------------------------

    \1185\ See supra footnotes 426-435 and accompanying text.
    \1186\ See supra footnotes 438-435 and accompanying text.
    \1187\ See Item 3.A.(ii) of Form CRS.
    \1188\ Proposing Release, supra footnote 5.
    \1189\ See, e.g., Wahl Letter; AARP Letter; Betterment Letter I.
    \1190\ NSCP Letter; Edward Jones Letter (noting that given the 
range of services available, it would be very difficult for 
financial professionals to fully address this question at the outset 
of the relationship, particularly for investors selecting 
transaction-based services); TIAA Letter; LPL Financial Letter; 
Primerica Letter; ICI Letter; SIFMA Letter (noting most firms do not 
currently have systems in place to allow financial professionals to 
answer customer-specific questions).
---------------------------------------------------------------------------

    Instead, to help stimulate this discussion, a firm must include in 
the relationship summary the following conversation starter: ``Help me 
understand how these fees and costs might affect my investments. If I 
give you $10,000 to invest, how much will go to fees and costs, and how 
much will be invested for me?'' \1191\ As discussed above,\1192\ this 
represents a different wording from the corresponding ``Do the Math for 
Me'' Key Question in the proposal, but we expect it to similarly 
encourage the retail investor to ask about the amount they would 
typically pay per year for the account and what is included in those 
fees, while being easier and less costly to answer for firms at the 
outset of the relationship.
---------------------------------------------------------------------------

    \1191\ Item 3.A.(iv) of Form CRS.
    \1192\ See supra Sections II.A.4 and II.B.3.a.
---------------------------------------------------------------------------

d. Filing and Delivery
    In connection with filing and delivery, Commission considered 
alternatives relating to filing formats, filing systems, and timeframes 
for firms' initial relationship summary and subsequent updates. As 
discussed in Section II.C. above, firms will file copies of their 
relationship summaries with the Commission. The proposed instructions 
provided that firms must file their relationship summaries in a text-
searchable format but did not specify one. We solicited comment on 
whether the relationship summary should be filed as a text-searchable 
PDF, similar to how Form ADV is currently filed, or other enumerated 
formats. We also asked about what type of format would facilitate 
greater comparability across forms. Two commenters advocated that the 
relationship summary should be filed not only in a text-searchable, but 
also machine-readable format, in order to facilitate development of 
data aggregation tools allowing for comparability of forms across 
providers.\1193\ The Commission believes that although a PDF submission 
format would not be the most ideal for comparing or aggregating data 
across relationship summary filings, it would likely be the easiest and 
least costly. A fillable form allowing the firm to enter text, similar 
to Form ADV Part 1, also would not be costly, but would not easily 
accept formatted tables or other graphical information. The final 
instructions, as with the proposed instructions, do not specify a 
particular format, but the current filing systems default firms to PDF 
format. In a change from the proposal, we are requiring firms to 
implement machine-readable headings for their filings. We agree with 
the commenters that suggested this change that this approach 
facilitates some degree of data aggregation, while imposing limited 
costs on registrants.
---------------------------------------------------------------------------

    \1193\ CFA Letter I (``past experience regarding investors' 
limited use of existing databases, such as IARD and BrokerCheck, 
cautions against placing too much reliance on investors' accessing 
the documents directly. We therefore urge the Commission to require 
that the documents be filed, not just in a text-searchable format, 
but in a machine-readable format.''); Schnase Letter (``the data 
contained in the Relationship Summary should be required to be filed 
in a structured data format, so the document can be utilized as a 
stand-alone human-readable document and serve as the source for a 
machine-readable data set'').
---------------------------------------------------------------------------

    Furthermore, we requested comments on alternative filing systems 
for the relationship summary. In response to comment and upon further 
consideration, as discussed in Section II.C.2 above,\1194\ we are 
requiring broker-dealers to file their relationship summaries through 
Web CRD[supreg], instead of EDGAR, as proposed.
---------------------------------------------------------------------------

    \1194\ See supra footnotes 666-669 and accompanying text.
---------------------------------------------------------------------------

    As discussed in Section II.C.3.a above, we also considered whether 
to allow more permissive use of electronic delivery. As proposed, we 
are affirming that the relationship summary must be delivered in 
accordance with the Commission's electronic delivery guidance. We are 
adopting an additional instruction, however, that a firm may 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, and that this 
method of initial delivery for the relationship summary would be 
consistent with the Commission's electronic delivery guidance.\1195\ 
Commenters suggested different approaches to electronic delivery, such 
as the ``notice plus access'' model, and a more comprehensive updating 
of the Commission's electronic delivery guidance, which we considered 
as alternative approaches in this rulemaking. While we recognize the

[[Page 33602]]

potential cost savings to firms of allowing greater use of electronic 
delivery, we place great importance on how investors prefer to receive 
information. Some commenters said that investors prefer to receive 
electronic disclosures because they are delivered faster and can be in 
more engaging formats, including video and audio. On the other hand, 
investor surveys and investor testing show that some investors still 
prefer to receive paper disclosures, including in a hybrid approach of 
electronic disclosure with the option for paper.\1196\ As discussed in 
greater detail in Section II.C.3.a, the adopted approach of encouraging 
electronic presentations that are engaging to retail investors, while 
preserving the option for paper, within the framework of the 
Commission's electronic delivery guidance and in accordance with retail 
investors' preferences, is appropriate for the relationship summary.
---------------------------------------------------------------------------

    \1195\ See Proposing Release, supra footnote 5, at nn.344-45 and 
accompanying text; see also 2000 Guidance, supra footnote 678, at 65 
FR 25845-46; 96 Guidance, supra footnote 678, at 61 FR 24647; and 95 
Guidance, supra footnote 678, at 60 FR 53461.
    \1196\ See supra footnotes 682-689 and accompanying text.
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e. Transition Provisions
    As discussed above, we are adopting an initial date of June 30, 
2020 for all firms that are registered, or investment advisers who have 
an application for registration pending with, the Commission prior to 
June 30, 2020, to file their initial relationship summaries with the 
Commission. We considered tiered compliance dates for firms of 
different sizes. We believe that the compliance dates, as adopted, 
balance the time and resources needed by different firms, as well as 
the assets under management and the number of firms that would be 
covered within the different compliance periods.

V. Paperwork Reduction Act Analysis

    The amendments that we are adopting here contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\1197\ In the Proposing Release, we 
solicited comment on the proposed collection of information 
requirements. We also submitted the proposed collection 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 
collections of information we are amending 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 we are 
adopting \1198\ relate to (i) ``Rule 204-5 under the Investment 
Advisers Act of 1940'' (OMB control number 3235-0767); and (ii) ``Form 
CRS and rule 17a-14 under the Exchange Act'' (OMB control number 3235-
0766). We are also amending 17 CFR 200.800 to display the control 
number assigned to information collection requirements for ``Form CRS 
and rule 17a-14 under the Exchange Act'' by OMB pursuant to the PRA. 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 OMB number.
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    \1197\ 44 U.S.C. 3501 et seq.
    \1198\ The Commission is not adopting two other rules in the 
Proposing Release that would have contained collections of 
information. Proposed rule 211h-1 under the Advisers Act and 
proposed rule 15l-3 under the Exchange Act relate to the disclosure 
of Commission registration status and financial professional 
association. As discussed in Section I above, we have concluded that 
the combination of the disclosure requirements in Form CRS and 
Regulation Best Interest should adequately address the objectives of 
the proposed Affirmative Disclosures.
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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 2A is the 
client brochure. 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 adopting amendments to Form ADV to add a new Part 3, 
requiring registered investment advisers that offer services to retail 
investors to prepare and file with the Commission, post to the 
adviser's website (if it has one), and deliver to retail investors a 
relationship summary, as discussed in greater detail in Section II 
above. Advisers will deliver the relationship summary to both existing 
clients and new or prospective clients who are 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 relationships and services the firm offers to retail investors, 
fees and costs that the retail investor will pay, specific conflicts of 
interest and standards of conduct, legal or disciplinary history, and 
how to obtain additional information about the firm. The amendment 
requiring investment advisers to deliver the relationship summary is 
contained in a new collection of information under new rule 204-5 under 
the Advisers Act, for which estimates are discussed below. We did not 
propose amendments to Part 1 or 2 of Form ADV.\1199\
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    \1199\ We are adopting 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 
amended General Instructions to Form ADV.
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    As discussed in Sections I and II of this release, we received 
comments that addressed whether the relationship summary is duplicative 
of other disclosures and necessary for investment advisers, and whether 
we could further minimize the burden of the proposed collections of 
information. One commenter specifically addressed the accuracy of our 
burden estimates for the proposed collection of information, suggesting 
that our estimates were too low because compliance professionals 
estimated it would take 80-500 hours to

[[Page 33603]]

prepare, deliver, and file the relationship summary, depending on the 
firm's size and business model.\1200\ Another commenter said the 
current Form ADV requirements are a burden to smaller firms and that 
the currently approved burdens of 23.77 hours and $6,051 are too 
low.\1201\ Others commented more broadly that certain costs to prepare 
and file the relationship summary would be higher than we estimated in 
the proposal.\1202\ We have considered these comments and are 
increasing our PRA burden estimates from 5 hours to 20 hours for 
investment advisers to prepare and file the relationship summary. We 
also modified several substantive requirements to mitigate some of 
these estimated increased costs relative to the proposal.
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    \1200\ See NSCP Letter.
    \1201\ See Marotta Letter.
    \1202\ See, e.g., MarketCounsel Letter. Others argued that the 
cost of Form CRS and Regulation Best Interest would be high. See, 
e.g., Raymond James Letter; CCMC Letter (investor polling results); 
SIFMA Letter.
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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 exempt reporting advisers.\1203\ Based on the IARD 
system data as of December 31, 2018, approximately 13,299 investment 
advisers were registered with the Commission, and 4,280 exempt 
reporting advisers file reports with the Commission.
---------------------------------------------------------------------------

    \1203\ 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 above, we are adopting amendments to Form ADV that 
will add a new Part 3, requiring certain registered investment advisers 
to prepare and file a short and accessible relationship summary for 
retail investors. Based on IARD system data as of December 31, 2018, 
the Commission estimates that 8,235 investment advisers have some 
portion of their business dedicated to retail investors, including 
either individual high net worth clients or individual non-high net 
worth clients,\1204\ which is higher relative to the estimate in the 
Proposing Release.\1205\
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    \1204\ Proposing Release, supra footnote 5, at Section V.A.1. 
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 in Item 5.D.(a)(1) of Form ADV or have regulatory 
assets attributable to either high net worth individuals or 
individuals other than high net worth individuals in Item 5.D.(a)(3) 
of Form ADV. The definition of retail investor will include the 
legal representatives of natural persons who seek to receive or 
receive services primarily for personal, family, or household 
purposes. As discussed in Section II.C.1 above, a legal 
representative of a natural person will cover only non-professional 
legal representatives (e.g., a non-professional trustee that 
represents the assets of a natural person and similar 
representatives such as executors, conservators, and persons holding 
a power of attorney for a natural person). We are not able to 
determine, based on responses to Form ADV, exactly how many advisers 
provide investment advice to these types of legal representatives or 
trustees; however, we believe that these advisers most likely also 
advise individuals and are therefore included in our estimate.
    \1205\ We estimated in the Proposing Release that approximately 
7,625 registered investment advisers of the 12,721 registered 
investment advisers would be subject to the relationship summary 
requirements, based on IARD system data as of December 31, 2017. See 
Proposing Release, supra footnote 5 at Section V.A.
---------------------------------------------------------------------------

    This will leave 5,064 registered investment advisers that do not 
provide advice to retail investors \1206\ and 4,280 exempt reporting 
advisers that will 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.\1207\ We also note that these figures 
include the burdens for 318 registered broker-dealers that are dually 
registered as investment advisers as of December 31, 2018.\1208\ We did 
not receive comments related to the methodology used for estimating the 
number of investment advisers that will be subject to Form ADV Part 3 
requirements. We are maintaining the methodology we used in the 
Proposing Release and are updating our estimates to reflect the 
increased number of investment advisers and exempt reporting advisers 
since the last burden estimate.
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    \1206\ 13,299 registered investment advisers--8,235 = 5,064 
registered investment advisers not providing advice to retail 
investors.
    \1207\ Based on IARD system data.
    \1208\ See supra footnote 863.
---------------------------------------------------------------------------

2. Changes in Average Burden Estimates and New Burden Estimates
    Based on the prior revision of Form ADV,\1209\ 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,\1210\ with a monetized total of $92,404,369, or $6,051 per 
adviser.\1211\ 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.\1212\ The amendments will increase the current burden estimate 
due in part to the 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 did not propose amendments to Part 1 or Part 2 of Form ADV.
---------------------------------------------------------------------------

    \1209\ See Form ADV and Investment Advisers Act Rules, Final 
Rule, Investment Advisers Act Release No. 4509 (Aug. 25, 2016) [81 
FR 60418 (Sept. 1, 2016)] (``2016 Form ADV Paperwork Reduction 
Analysis'').
    \1210\ 363,082 hours/(12,024 registered advisers + 3,248 exempt 
reporting advisers) = 23.77 hours.
    \1211\ $92,404,369 hours/(12,024 registered advisers + 3,248 
exempt reporting advisers) = $6,051.
    \1212\ See 2016 Form ADV Paperwork Reduction Analysis, supra 
footnote 1209, at 81 FR 60454.
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    The amendments to Form ADV to add Part 3 will increase the 
information collection burden for registered investment advisers with 
retail investors. As discussed above in Sections I and II of this 
release, registered investment advisers providing services to retail 
investors will be required to prepare and file a relationship summary 
with the Commission electronically through IARD in the same manner as 
they currently file Form ADV Parts 1 and 2. We are also requiring that 
all relationship summaries be filed in a text-searchable format with 
machine-readable headings. These investment advisers also will be 
required to amend and file an updated relationship summary within 30 
days whenever any information becomes materially inaccurate.
    As noted above, not all investment advisers will 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 will remain the same, in particular, 29.22 hours per 
registered investment adviser without relationship summary obligations. 
Similarly, because exempt reporting advisers also will not have 
relationship

[[Page 33604]]

summary obligations, the annual hour burden for exempt reporting 
advisers to meet their Form ADV obligations will remain the same, at 
3.60 hours per exempt reporting adviser. However, although we did not 
propose amendments to Form ADV Part 1 and Part 2, and the per adviser 
information collection burden will 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 
will increase due to an increase in the number of registered investment 
advisers and exempt reporting advisers since the last information 
collection burden estimate. We discuss below the increase in burden for 
Form ADV overall attributable to the adopted amendments, i.e., new Form 
ADV Part 3: Form CRS, and the increase due to the updated number of 
respondents that will not be subject to the adopted amendments.
a. Initial Preparation and Filing of Relationship Summary
    As discussed above in Section II, investment advisers will be 
required to prepare and file a relationship summary summarizing 
specific aspects of their investment advisory services that they offer 
to retail investors. Much of the required information overlaps with 
that required by Form ADV Part 2A 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 2A brochure on IARD, and we have considered this factor in 
determining our estimate of the additional burden to prepare and file 
the relationship summary.
    In the Proposing Release, we estimated that the initial first year 
burden for preparing and filing the relationship summary, for 
investment advisers that provide advice to retail investors, would be 5 
hours per registered adviser.\1213\ Some commenters said that these 
estimated burdens were too low,\1214\ and one argued that the current 
burden estimates for Form ADV are too low.\1215\ One commenter 
specifically argued that preparing, delivering, and filing the 
relationship summary would take from 80 to 500 hours, based on input 
from compliance professionals, and noted there would be additional 
costs that are hard to quantify, including human resources and 
information technology programming.\1216\ Commenters also said more 
broadly that the relationship summary would be burdensome for 
investment advisers \1217\ and would result in additional compliance 
burdens including training.\1218\
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    \1213\ See Proposing Release, supra footnote 5, at nn.356 -367 
and accompanying text.
    \1214\ See, e.g., NSCP Letter; see also CCMC Letter (costs to 
implement the proposal were underestimated and greater than 40% of 
firms surveyed anticipate having to spend a moderate or substantial 
amount to implement Regulation Best Interest and Form CRS); SIFMA 
Letter (stating that implementation costs of Regulation Best 
Interest and Form CRS would be significant).
    \1215\ See Marotta Letter.
    \1216\ See NSCP Letter.
    \1217\ See MarketCounsel Letter.
    \1218\ See NSCP Letter (stating that a minimum of two hours of 
firm level training or two hours of training per independent 
registered representative will be required prior to implementation 
and delivery of the relationship summary).
---------------------------------------------------------------------------

    We are revising our estimate of the time that it would take each 
adviser to prepare and file the relationship summary in the first year 
from 5 hours in the proposal to 20 hours in light of these comments and 
the changes we are making to the proposed relationship summary.\1219\ 
For example, as discussed in the Proposing Release, we estimated that 
it would take firms a shorter amount of time to prepare the 
relationship summary than to prepare more narrative disclosures due to 
the standardized nature and prescribed language of the relationship 
summary. As discussed above, the final instructions require less 
prescribed wording relative to the proposal and require firms to draft 
their own summaries for most of the sections. In addition and in a 
change from the proposal, we are now requiring that all relationship 
summaries be filed with machine-readable headings, as well as in a 
text-searchable format as proposed. We acknowledge that these changes 
will increase cost burdens because advisers will have to develop their 
own wording and design, as well as implement machine-readable headings, 
to comply with these requirements.
---------------------------------------------------------------------------

    \1219\ See infra footnote 1221.
---------------------------------------------------------------------------

    The relationship summary will also require more layered disclosures 
relative to the proposal and will encourage the use of electronic 
formatting and graphical, text, online features to facilitate access to 
other disclosures that provide additional detail. Although much of the 
information that will be summarized in the relationship summary is 
contained in other disclosures that firms already provide, firms will 
bear the cost of preparing a new relationship summary and cross-
referencing or hyperlinking to additional information. The higher 
estimated burden estimate also reflects our acknowledgement that it 
will take firms longer to draft certain disclosures than we estimated 
in the Proposing Release, such as answers to ``conversation starters'' 
that advisers providing automated investment advisory without a 
particular individual with whom a retail investor can discuss these 
questions must include on their website. We believe these factors and 
the other changes we made to the proposal will increase the burden to 
prepare a relationship summary relative to the proposal.
    We are estimating the same hourly burden for investment advisers 
and investment advisers that are dually registered as broker-dealers 
because we are counting dually registered firms in the burden 
calculation for Form ADV and the Exchange Act rule that requires the 
relationship summary for broker-dealers.\1220\ We recognize that the 
burden for some advisers will exceed our estimate, and the burden for 
others will be less due to the nature of their business, but we do not 
believe that the range could be as high as some commenters 
suggested.\1221\ After consideration of comments and changes we made to 
the requirements relative to the proposal and in light of the current 
approved burden for Part 2 of Form ADV, which requires more disclosures 
than the relationship summary, we are increasing the estimated burden 
relative to the proposal to 20 hours in the first year.\1222\ We 
therefore estimate that the

[[Page 33605]]

total burden of preparing and filing the relationship summary will be 
164,700 hours.\1223\
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    \1220\ The burden estimates for dual registrants to prepare and 
file the relationship summary are accounted for in the burden 
estimates for Form ADV and under Exchange Act rule 17a-14. For 
example, a dual registrant that prepares an initial relationship 
summary that covers both its advisory business and broker-dealer 
business has an estimated burden of 60 hours amortized (20 hours to 
prepare and file relationship summary related to the advisory 
business + 40 hours to prepare and file relationship summary related 
to the broker-dealer business).
    \1221\ See NSCP Letter (estimating that the time required to 
prepare, deliver and file the relationship summary would be anywhere 
from 80 to 500 hours). In estimating the cost for the initial 
preparation of Form ADV Part 2, we estimated that small, medium, and 
large advisers would require 15, 97.5, and 1989 hours respectively 
to prepare Form ADV Parts 1 and 2, for investment advisers overall, 
and the per adviser annual hour burden for meeting their Form ADV 
Parts 1 and 2 requirements is 36.24 hours. See Brochure Adopting 
Release, supra footnote 576, at 75 FR at 49257. In comparison, as 
discussed above, the relationship summary is limited to two pages in 
length for standalone investment advisers and four pages in length 
for dual registrants in paper format (or equivalent in electronic 
format). While we recognize that different firms may require 
different numbers of hours to prepare and file the relationship 
summary, we believe that a first year average of 20 hours for 
investment advisers with relationship summary obligations is an 
appropriate estimate for purposes of calculating an aggregate burden 
for the industry, for purposes of the PRA analysis, particularly 
given our experience with the burdens for Form ADV Parts 1 and 2.
    \1222\ We believe that much of the information required in the 
relationship summary overlaps with that required by Form ADV Part 2 
and therefore should be readily available to investment advisers 
because of their existing disclosure obligations. Accordingly, 
although these new requirements will cause an increase in the 
information collected, the increased burden should largely be 
attributable to data entry and not data collection.
    \1223\ 20.0 hours x 8,235 investment advisers = 164,700 total 
aggregate initial hours.
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    As with the Commission's prior Paperwork Reduction Act estimates 
for Form ADV, we believe that most of the paperwork burden will be 
incurred in advisers' initial preparation and filing of the 
relationship summary, and that over time this burden will decrease 
substantially because the paperwork burden will be limited to updating 
information.\1224\ The estimated initial burden associated with 
preparing and filing the relationship summary will be amortized over 
the estimated period that advisers will use the relationship summary, 
i.e., over a three-year period.\1225\ The annual hour burden of 
preparing and filing the relationship summary will therefore be 
54,900.\1226\ In addition, based on IARD system data, the Commission 
estimates that 1,227 new investment advisers will file Form ADV with us 
annually; of these, 656 will be required to prepare and file the 
relationship summary.\1227\ Therefore, the aggregate initial burden for 
newly registered advisers to prepare and file the relationship summary 
will be 13,120 \1228\ and, amortized over three years, 4,373 on an 
annual basis.\1229\ In sum, the annual hour burden for existing and 
newly registered investment advisers to prepare and file a relationship 
summary will be 59,273 hours,\1230\ or approximately 6.67 hours per 
adviser,\1231\ for an annual monetized cost of $16,181,529, or $1,965 
per adviser.\1232\
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    \1224\ We discuss the burden for advisers making annual updating 
amendments to Form ADV in Section V.A.2.c below.
    \1225\ See 2016 Form ADV Paperwork Reduction Analysis, supra 
footnote 1209. Amortizing the 20 hour burden imposed by the 
relationship summary over a three-year period will result in an 
average annual burden of 6.67 hours per year for each of the 8,235 
investment advisers with relationship summary obligations.
    \1226\ 20.0 hours x 8,235 investment advisers/3 = 54,900 total 
annual aggregate hours.
    \1227\ The number of new investment advisers is calculated by 
looking at the number of new advisers in 2017 and 2018 and then 
determining the number each year that serviced retail investors. 
(644 for 2017 + 668 for 2018)/2 = 656.
    \1228\ 656 new RIAs required to prepare relationship summary x 
20.0 hours = 13,120 hours for new RIAs to prepare relationship 
summary.
    \1229\ 656 x 20.0 hours/3 = 4,373.
    \1230\ (164,700 + 13,120)/3 years = 59,273 annual hour burden 
for existing and new advisers to prepare and file relationship 
summary.
    \1231\ 59,273 hours/(8,235 existing advisers + 656 new advisers) 
= 6.67 hours per year.
    \1232\ 59,273 is the total aggregate initial hour burden for 
preparing and filing a relationship summary. We believe that 
performance of this function will most likely be equally allocated 
between a senior compliance examiner and a compliance manager. Data 
from the Securities Industry Financial Markets Association's 
Management & Professional Earnings in the Securities Industry 2013 
(``SIFMA Management and Professional Earnings Report''), modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 (professionals) or 2.93 (office) 
to account for bonuses, firm size, employee benefits, and overhead, 
suggest that costs for these positions are $237 and $309 per hour, 
respectively. (59,273 hours x 50% x $237) + (59,273 hours x 50% x 
$309 = $16,181,529). $16,181,529/8,235 investment advisers = $1,965 
per investment adviser. The SIFMA Management and Professional 
Earnings Report was updated in 2019 to reflect inflation. The 
numbers in the report are higher than the numbers we used in the 
Proposing Release and, along with the higher hourly burden, result 
in higher cost estimates in this release, relative to the proposal.
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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.\1233\ We do not anticipate that the amendments to add a new 
Part 3 will affect the per adviser cost burden for those existing 
requirements but 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. We do not 
anticipate external costs to investment advisers in the form of website 
set-up, maintenance, or licensing fees because they will 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.
---------------------------------------------------------------------------

    \1233\ See 2016 Form ADV Paperwork Reduction Analysis, supra 
footnote 1209, at 81 FR 60452. The estimated external costs of 
outside legal and consulting services for the relationship summary 
are in addition to the estimated hour burden discussed above.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that an external service 
provider would spend 3 hours helping an adviser prepare an initial 
relationship summary. While we received no specific comments on our 
estimate regarding external costs in the Proposing release, one 
commenter suggested that there would be additional implementation costs 
such as legal advice, but that these costs are difficult to 
quantify.\1234\ Another argued that that the current burden estimates 
for Form ADV did not take into consideration the time spent on learning 
about the complexities of what is needed to comply with similar 
requirements.\1235\ Based on the concerns expressed by these commenters 
and the changes we are making to the relationship summary, we are 
increasing the estimate relative to the proposal from 3 to 5 hours. 
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, 
particularly given our experience with the burdens for Form ADV.\1236\
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    \1234\ See NSCP Letter.
    \1235\ See Marotta Letter.
    \1236\ 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. See Brochure 
Adopting Release, supra footnote 576, at 75 FR at 49257. In 
comparison, as discussed above, the relationship summary is limited 
to two pages in length for standalone investment advisers and four 
pages in length for dual registrants in paper format (or equivalent 
in electronic format).
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    Although advisers that will 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 strict page 
limits will make it unlikely that the amount of time, and thus cost, 
required for outside legal and compliance review will vary 
substantially among those advisers who elect to obtain outside 
assistance.
    Most of the information required in the relationship summary is 
readily available to investment advisers from Form ADV Part 2A, and the 
narrative descriptions are concise, brief, and at a summary level. As a 
result, we continue to anticipate, as discussed in the proposal, that 
only 25% of investment advisers will seek the help of outside legal 
services and 50% of investment advisers will seek the help of 
compliance consulting services in connection with the initial 
preparation of the relationship summary.\1237\ We estimate that the 
initial per existing adviser cost for legal services related to

[[Page 33606]]

the preparation of the relationship summary will be $2,485.\1238\ We 
estimate that the initial per existing adviser cost for compliance 
consulting services related to the preparation of the relationship 
summary will be $3,705.\1239\ Thus, the incremental external cost 
burden for existing investment advisers is estimated to be $20,371,331, 
or $6,790,444 annually when amortized over a three-year period.\1240\ 
In addition, we estimate that 1,227 new advisers will register with us 
annually, 656 of which will be required to prepare a relationship 
summary. For these 656 new advisers, we estimate that they will require 
$1,622,780 in external costs to prepare the relationship summary, or 
$540,927 amortized over three years.\1241\ In summary, the annual 
external legal and compliance consulting cost for existing and new 
advisers relating to obligations to prepare the relationship summary is 
estimated to total $7,331,370, or $825 per adviser.\1242\
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    \1237\ See Proposing Release, supra footnote 5 at Section V.A. 
We did not receive comments on these estimates. While we recognize 
that the instructions have changed, we continue to believe that only 
25% of advisers will seek help of outside legal services and 50% of 
advisers will seek compliance consulting services, and that these 
estimates are appropriate for purposes of the PRA analysis, 
particularly given our experience with the external burdens for Form 
ADV Parts 1 and 2.
    \1238\ External legal fees are in addition to the projected hour 
per adviser burden discussed above. Data from the SIFMA Management 
and Professional Earnings Report suggest that outside legal services 
cost approximately $497 per hour. $497 per hour for legal services x 
5 hours per adviser = $2,485. The hourly cost estimate of $497 is 
based on an inflation-adjusted figure and our consultation with 
advisers and law firms who regularly assist them in compliance 
matters.
    \1239\ 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, suggest that outside management consulting 
services cost approximately $741 per hour. $741 per hour for outside 
consulting services x 5 hours per adviser = $3,705.
    \1240\ 25% x 8,235 existing advisers x $2,485 for legal services 
= $5,115,994 for legal services. 50% x 8,235 existing advisers x 
$3,705 for compliance consulting services = $15,255,338. $5,115,994 
+ $15,255,338 = $20,371,331 in external legal and compliance 
consulting costs for existing advisers. $20,371,333/3 = $6,790,444 
annually.
    \1241\ 25% x 656 new advisers x $2,485 for legal services = 
$407,540. 50% x 656 new advisers x $3,705 for compliance consulting 
services = $1,215,240. $407,540 + $1,215,240 = $1,622,780 in 
external legal and compliance consulting costs for new advisers. 
$1,622,780/3 = $540,927.annually in external legal and compliance 
consulting costs for newly registered advisers.
    \1242\ $6,790,444 in annual external legal and compliance 
consulting costs for existing advisers + $540,927 annually for new 
advisers = $7,331,370 annually for existing and new advisers. 
$7,331,370/(8,235 existing advisers + 656 new advisers) = $825 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. In the Proposing 
Release, we estimated that the relationship summary would increase the 
annual burden associated with Form ADV by 0.5 hours \1243\ due to 
amendments to the relationship summary, for those advisers required to 
prepare and file a relationship summary. We did not receive comments 
regarding hour burdens associated with preparing and filing amendments 
to the relationship summary. As discussed in section II.C.4 above, in a 
change from the proposal, we are adding a requirement that firms 
preparing updated relationship summaries to existing clients also 
highlight the most recent changes by, for example, marking the revised 
text or including a summary of material changes.\1244\ To account for 
this change, we are increasing the annual burden to 1 hour per year to 
amend and file a relationship summary.\1245\
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    \1243\ 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 footnote 1209, at 81 FR at 60452.
    \1244\ Additionally, we are requiring that the additional 
disclosure showing the revised text or summarizing the material 
changes be attached as an exhibit to the unmarked relationship 
summary.
    \1245\ We believe that the time estimated to prepare and file an 
amendment to the relationship summary is closer to the amount of 
time to prepare an interim-other-than-annual amendment to Form ADV. 
See, e.g., Brochure Adopting Release, supra footnote 576, at 75 FR 
at 49257.
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    We do not expect amendments to be frequent, but based on the 
historical frequency of amendments made on Form ADV Parts 1 and 2, we 
estimate that on average, each adviser preparing a relationship summary 
will likely amend and file the disclosure an average of 1.71 times per 
year.\1246\ We therefore estimate that for making and filing amendments 
to their relationship summaries, advisers will incur an estimated total 
paperwork burden of 14,082 hours per year,\1247\ or approximately 1.58 
hours per adviser,\1248\ for an annual monetized cost of $3,844,386, or 
$467 per adviser.\1249\
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    \1246\ Based on IARD data as of December 31, 2018, 8,235 
investment advisers with retail clients filed 14,118 other-than-
annual amendments to Form ADV. 14,118 other-than-annual amendments/
8,235 investment advisers = 1.71 amendments per investment adviser. 
We estimated in the Proposing Release that advisers with 
relationship summary obligations will amend and file disclosures on 
average of 1.8 times per year, based on IARD system data as of 
December 31, 2017. See Proposing Release, supra footnote 5 at 
Section V.A.
    \1247\ 8,235 investment advisers amending relationship summaries 
x 1.71 amendments per year x 1 hour = 14,082 hours.
    \1248\ 14,082 hours/(8,235 existing advisers + 656 new advisers) 
= 1.58 hours per year.
    \1249\ 14,082 is the total aggregate initial hour burden for 
amending relationship summaries. We believe that performance of this 
function will most likely be equally allocated between a senior 
compliance examiner and a compliance manager. Data from the SIFMA 
Management and Professional Earnings Report suggest that costs for 
these positions are $237 and $309 per hour, respectively. (14,082 
hours x 50% x $237 + 14,082 hours x 50% x $309 = $3,844,386. 
$3,844,386/8,235 investment advisers = $467 per investment adviser.
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    Although advisers will be required to amend the relationship 
summary within 30 days whenever any information becomes materially 
inaccurate, we expect that amendments will require relatively minimal 
wording changes, given the relationship summary's page limitation and 
summary nature. We believe that investment advisers will be more 
knowledgeable about the information to include in the amended 
relationship summaries than outside legal or compliance consultants and 
will be able to make these revisions in-house. Therefore, we do not 
estimate that investment advisers will need to incur ongoing external 
costs for the preparation and review of relationship summary 
amendments.
d. Incremental Increase to Form ADV Hourly and External Cost Burdens 
Attributable to Form ADV Part 3 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 
73,355 hours,\1250\ or 8.25 hours per adviser,\1251\ and a monetized 
cost of $20,025,915, or $2,252 per adviser.\1252\ The incremental 
external legal and compliance cost is estimated to be $7,331,370.\1253\
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    \1250\ 59,273 hours for initial preparation and filing of the 
relationship summary + 14,082 hours for amendments to the 
relationship summary = 73,355 total aggregate annual hour burden 
attributable to the Form ADV amendments to add Part 3: Form CRS.
    \1251\ 73,355 hours/(8,235 existing advisers + 656 newly 
registered advisers) = 8.25 hours per adviser.
    \1252\ 73,355 total aggregate annual hour burden for preparing, 
filing, and amending a relationship summary. We believe that 
performance of this function will most likely be equally allocated 
between a senior compliance examiner and a compliance manager. Data 
from the SIFMA Management and Professional Earnings Report suggest 
that costs for these positions are $237 and $309 per hour, 
respectively. 73,355 hours x 50% x $237 = $8,692,568. 73,355 hours x 
50% x $309 = $11,333,348. $8,692,568 + $11,333,348 = $20,025,915. 
$20,025,915/(8,235 existing registered advisers + 656 newly 
registered advisers) = $2,252 per adviser.
    \1253\ See supra footnote 1242.

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[[Page 33607]]

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 
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. One commenter said that the current Form ADV 
requirements are a burden to smaller firms and that the currently 
approved burdens for Form ADV Parts 1 and 2 are too low.\1254\ We 
disagree. We recognize that the burden for some advisers will exceed 
our estimate and the burden for others will be less due to the nature 
of their business, but we continue to believe that on average our 
estimates are appropriate for purposes of the PRA analysis. For 
example, the current burden estimates for Form ADV Parts 1 and 2 range 
from 15 hours for smaller advisers to 1989 hours for larger 
advisers.\1255\
---------------------------------------------------------------------------

    \1254\ See Marotta Letter.
    \1255\ See supra footnote 1221.
---------------------------------------------------------------------------

    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 amendments to Form ADV, equals 37.47 hours per 
adviser, with 8.25 hours attributable to the adopted amendments.\1256\ 
On an aggregate basis, this totals 333,146 hours for existing and newly 
registered advisers, with a monetized value of $90,978,858.\1257\
---------------------------------------------------------------------------

    \1256\ 29.22 hours + 8.25 hours for increase in burden 
attributable to initial preparation and filing of, and amendments 
to, relationship summary = 37.47 hours total.
    \1257\ 37.47 hours x (8,235 existing RIAs required to prepare a 
relationship summary + 656 newly registered RIAs required to prepare 
a relationship summary) = 333,146 total aggregate annual hour burden 
for preparing, filing and amending a relationship summary. We 
believe that performance of this function will most likely be 
equally allocated between a senior compliance examiner and a 
compliance manager. Data from the SIFMA Management and Professional 
Earnings Report suggest that costs for these positions are $237 and 
$309 per hour, respectively. 333,146 hours x 0.5 x $237 = 
$39,477,801. 333,146 hours x 0.5 x $309 = $51,471,057. $39,477,801 + 
$51,471,057 = $90,948,858.
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    As noted above, we estimate 5,064 of existing registered advisers 
will not have retail investors; therefore, they will not be obligated 
to prepare and file relationship summaries, so their annual per adviser 
hour burden will remain unchanged.\1258\ 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 will be 164,655,\1259\ with a monetized value of 
$44,950,816.\1260\ 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, will be 16,996 
hours,\1261\ for a monetized cost of $4,639,908, or $983 per exempt 
reporting adviser.\1262\
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    \1258\ 13,299 registered investment advisers--8,235 registered 
investment advisers with retail investors = 5,064 registered 
investment advisers without retail investors.
    \1259\ 29.22 hours x (5,064 existing and 571 newly-registered 
investment advisers without retail investors) = approximately 
164,655 total annual hour burden for RIAs not preparing a 
relationship summary.
    \1260\ We believe 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 
SIFMA Management and Professional Earnings Report suggest that costs 
for these positions are $237 and $309 per hour, respectively. 
164,655 hours x 50% x $237 = $19,511,618. 164,655 hours x 50% x $309 
= $25,439,198. $19,511,618 + $25,439,198 = $44,950,816.
    \1261\ 3.60 hours x 4,280 exempt reporting advisers currently + 
441 new exempt reporting advisers = 16,996 hours.
    \1262\ As with preparation of the Form ADV for registered 
advisers, we believe 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 
SIFMA Management and Professional Earnings Report suggest that costs 
for these positions are $237 and $309 per hour, respectively. 16,996 
hours x 0.5 x $237 = $2,014,026. 16,996 hours x 0.5 x $309 = 
$2,625,882. $2,014,026 + $2,625,882 = $4,639,908. $4,639,908/(4,280 
exempt reporting advisers currently + 441 new exempt reporting 
advisers) = $983 per exempt reporting adviser.
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    In summary, factoring in the amendments to Form ADV to add Part 3, 
the revised annual aggregate burden for Form ADV for all registered 
advisers and exempt reporting advisers will be 514,797,\1263\ for a 
monetized cost of $140,569,582.\1264\ This results in an annual blended 
average per adviser burden for Form ADV of 29.28 hours \1265\ and 
$7,996 per adviser.\1266\ This is an increase of 151,715 hours, \1267\ 
or $48,165,213 \1268\ in the monetized value of the hour burden, from 
the currently approved annual aggregate burden estimates, increases 
which are attributable primarily to the larger registered investment 
adviser and exempt reporting adviser population since the most recent 
approval, adjustments for inflation, and the amendments to Form ADV to 
add Part 3.
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    \1263\ 333,146 annual hour burden for RIAs preparing 
relationship summary + 164,655 annual hour burden for RIAs not 
preparing relationship summary + 16,996 annual hour burden for 
exempt reporting advisers = 514,797 total updated Form ADV annual 
hour burden.
    \1264\ $90,948,858 for RIAs preparing relationship summary + 
$44,950,816 for RIAs not preparing relationship summary + $4,639,908 
for exempt reporting advisers = $140,539,582 total updated Form ADV 
annual monetized hourly burden.
    \1265\ 514,797/(13,299 registered investment advisers + 4,280 
exempt reporting advisers) = 29.28 hours per adviser.
    \1266\ $140,569,582/13,299 registered investment advisers + 
4,280 exempt reporting advisers) = $7,995 per adviser.
    \1267\ 514,797 hours estimated--363,082 hours currently approved 
= 151,715 hour increase in aggregate annual hourly burden.
    \1268\ $140,569,582 monetized hourly burden--$92,404,369 = 
$48,135,213 increase in aggregate annual monetized hourly burden.
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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.\1269\ 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.\1270\ We do

[[Page 33608]]

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 aggregate cost 
of obtaining the fair value of private fund assets is likely to 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, 2018, 4,806 registered advisers advise private 
funds. We therefore estimate that approximately 288 registered advisers 
may incur costs of $37,625 each on an annual basis, for an aggregate 
annual total cost of $10,836,000.\1271\
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    \1269\ See 2016 Form ADV Paperwork Reduction Analysis, supra 
footnote 1209, at 81 FR 60452. We do not anticipate that the 
amendments we are adopting 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 
compliance consulting services for the relationship summary are in 
addition to the estimated hour burden discussed above.
    \1270\ See 2016 Form ADV Paperwork Reduction Analysis, supra 
footnote 1209, 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.
    \1271\ 6% x 4,806 = 288 advisers needing to obtain the fair 
value of certain private fund assets. 288 advisers x $37,625 = 
$10,836,000.
---------------------------------------------------------------------------

    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 relationship summary, we estimate the 
annual aggregate external cost burden of the Form ADV information 
collection will be $21,767,370, or $1,637 per registered adviser.\1272\ 
This represents an $8,083,870 increase from the current external costs 
estimate for the information collection.\1273\
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    \1272\ $3,600,000 for preparation of Form ADV Part 2 + 
$10,836,000 for registered investment advisers to fair value their 
private fund assets + $7,331,370 (see supra footnote 1242) to 
prepare relationship summary = $21,767,370 in total external costs 
for Form ADV. $21,767,370/13,299 total registered advisers as of 
December 31, 2018 = $1,637 per registered adviser.
    \1273\ $21,767,370--$13,683,500 = $8,083,870.
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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.
    The amendments to rule 204-2 will require registered advisers to 
retain copies of each relationship summary. Investment advisers will 
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. These 
records will 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 for the Form ADV Part 2A brochure under the Advisers Act 
rule 204-2(a)(14)(i), to allow regulators to access the relationship 
summary during an examination.\1274\
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    \1274\ Specifically, investment advisers will be required to 
maintain and preserve records 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. See Advisers Act rule 204-2(e)(1).
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    As discussed above in Section II.E several commenters suggested 
that our estimated burdens for the relationship summary recordkeeping 
obligations were too low.\1275\ Some commenters argued that keeping 
records of when a relationship summary was given to prospective retail 
clients would be unnecessarily burdensome or not feasible, and was not 
adequately considered in the Commission's burden estimates.\1276\ One 
of these commenters said that it would be difficult for firms to 
integrate pre-relationship delivery dates into their operational 
systems and procedures, and that there is no way to track when a 
disclosure is accessed on a website.\1277\
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    \1275\ See, e.g., CCMC Letter; SIFMA Letter. See also NSCP 
Letter (estimating 80-500 hours to prepare, deliver, and file the 
relationship summary, including recordkeeping policies and 
procedures).
    \1276\ See, e.g., CCMC Letter; SIFMA Letter; Committee of 
Annuity Insurers Letter; Edward Jones Letter. A few others stated 
that creating recordkeeping policies and procedures relating to how 
professionals respond to ``key questions'' would be burdensome and 
extremely difficult. See, e.g., LPL Financial Letter. Although the 
final instructions require ``conversation starter'' questions that 
are similar to the proposed ``key questions,'' we are not increasing 
the burden as urged by commenters. As discussed in Section V.A.2.a. 
above, we increased the burden estimates for the initial preparation 
of the relationship summary, acknowledging, among other things, that 
certain advisers that provide automated investment advisory services 
will incur additional burdens to develop written answers to the 
conversation starters and make those available on their websites 
with a hyperlink to the appropriate page in the relationship summary 
for these documents (i.e., robo-advisers). However, we do not expect 
these advisers to incur additional recordkeeping burdens under 
amendments to rule 204-2 because we are not establishing new or 
separate recordkeeping obligations related to the conversation 
starters or the answers provided by firms in response to the 
conversation starters. See supra footnotes 814-816.
    \1277\ See SIFMA Letter.
---------------------------------------------------------------------------

    Based on our experience with similar requirements for Form ADV Part 
2A brochures, we disagree with commenters that retaining records of 
when a relationship summary was given to prospective retail clients 
would be significantly more burdensome for investment advisers than our 
proposed estimate of 0.2 hours. While we recognize that this 
recordkeeping requirement will impose some additional burden on 
investment advisers that must prepare and deliver relationship 
summaries, advisers are already required to keep similar records for 
the delivery of the Form ADV Part 2A brochures and the currently 
approved burden for that requirement is 1.5 hours. Accordingly, based 
on our experience, advisers already maintain this information with 
respect to their brochures and should be able to update their systems 
to also include the relationship summary. We also do not expect that 
investment advisers will incur additional external costs to make and 
keep these records because we believe that advisers will create and 
retain them in a manner similar to their current recordkeeping 
practices for the Form ADV Part 2A brochure.
    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 will facilitate the 
Commission's ability to inspect for and enforce compliance with firms' 
obligations with respect to the relationship summary. The information 
generally is kept confidential.\1278\
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    \1278\ See section 210(b) of the Advisers Act.
---------------------------------------------------------------------------

    The likely respondents to this collection of information are all of 
the approximately 13,299 advisers currently registered with the 
Commission. We estimate that based on updated IARD data as of December 
31, 2018, 8,235 existing advisers will be subject to the amended 
provisions of rule 204-2 to preserve the relationship summary as a 
result of the adopted amendments.
1. Changes in Burden Estimates and New Burden Estimates
    The currently approved annual aggregate burden for rule 204-2 is 
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

[[Page 33609]]

adviser.\1279\ We estimate that the requirements to make and keep 
copies of each relationship summary under the amendments to rule 204-2 
will result in an increase in the collection of information burden 
estimate by 0.2 hours \1280\ for each of the estimated 8,235 registered 
advisers with relationship summary obligations, resulting in a total of 
183.2 hours per adviser. This will yield an annual estimated aggregate 
burden of 1,508,652 hours under amended rule 204-2 for all registered 
advisers with relationship summary obligations,\1281\ for a monetized 
cost of $95,588,191, or $11,607 per adviser.\1282\ In addition, the 
5,064 advisers not subject to the amendments will continue to be 
subject to an unchanged burden of 183 hours under rule 204-2, or a 
total aggregate annual hour burden of 926,712,\1283\ for a monetized 
cost of $58,716,472, or $11,595 per adviser.\1284\ The increase in the 
collection of information burden estimate by 0.2 hours as a result of 
the amendments to rule 204-2 will therefore result in an annual 
monetized cost of $12 per adviser.\1285\ In summary, taking into 
account the estimated annual burden of registered advisers that will 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 amendments, is estimated to be 
2,435,364 total hours,\1286\ for a monetized cost of 
$154,304,663.\1287\
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    \1279\ See 2016 Form ADV Paperwork Reduction Analysis, supra 
footnote 1209, at 81 FR at 60454-55.
    \1280\ 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 the 
relationship summary is already included in the collection of 
information estimates for Form ADV, we estimate that recordkeeping 
burden for the relationship summary will be considerably less than 
1.5 hours and estimate that 0.2 hours is appropriate.
    \1281\ 8,235 registered investment advisers required to prepare 
relationship summary x 183.2 hours = 1,508,652 hours.
    \1282\ As with our estimates relating to the previous amendments 
to Advisers Act rule 204-2 (see 2016 Form ADV Paperwork Reduction 
Analysis, supra footnote 1209, 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, suggest that costs for these position are 
$70 and $62, respectively. (17% x 1,508,652 hours x $70) + (83% x 
1,508,652 hours x $62) = $95,588,191. $95,588,191/8,235 advisers = 
$11,607 per adviser.
    \1283\ 5,064 registered investment advisers not required to 
prepare the relationship summary x 183 hours = 926,712.
    \1284\ As with our estimates relating to the previous amendments 
to Advisers Act rule 204-2 (see 2016 Form ADV Paperwork Reduction 
Analysis, supra footnote 1209, 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 $70 and $62, respectively. (17% x 
926,712 hours x $70) + (83% x 926,712 hours x $62) = $58,716,473. 
$58,716,473/5,064 = $11,595 per adviser.
    \1285\ $11607 aggregate burden per adviser subject to 
relationship summary-$11,595 aggregate burden per adviser not 
subject to the relationship summary = $12.
    \1286\ 8,235 registered investment advisers required to prepare 
relationship summary x 183.2 hours = 1,508,652 hours. 5,064 
registered investment advisers not required to prepare the 
relationship summary x 183 hours = 926,712 hours. 1,508,652 hours + 
26,712 hours = 2,435,364 hours.
    \1287\ $95,588,191 + $58,716,473 = $154,304,664.
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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.\1288\ The revised annual 
aggregate hourly burden for rule 204-2 will be 2,435,364 \1289\ hours, 
represented by a monetized cost of $154,304,664,\1290\ based on an 
estimate of 8,235 registered advisers with the relationship summary 
obligation and 5,064 registered advisers without, as noted above. This 
represents an increase of 235,573 \1291\ annual aggregate hours in the 
hour burden and an annual increase of $23,988,552 from the currently 
approved total aggregate monetized cost for rule 204-2.\1292\ These 
increases are attributable to a larger registered investment adviser 
population since the most recent approval and adjustments for 
inflation, as well as the rule 204-2 amendments relating to the 
relationship summary as discussed in this release.
---------------------------------------------------------------------------

    \1288\ 2,199,791 hours/12,024 registered advisers = 183 hours 
per adviser.
    \1289\ See supra footnote 1286.
    \1290\ See supra footnote 1287.
    \1291\ 2,435,364 hours-2,199,791 hours = 235,573 hours.
    \1292\ $154,304,664-$130,316,112 = $23,988,552.
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C. Rule 204-5 under the Advisers Act

    New rule 204-5 will require an investment adviser to deliver an 
electronic or paper version of the relationship summary to each retail 
investor before or at the time the adviser enters into an investment 
advisory contract with the retail investor. The adviser also will make 
a one-time initial delivery of the relationship summary to all existing 
clients within a specified time period after the effective date of the 
rule. Also with respect to existing clients, the adviser will deliver 
the most recent relationship summary before or at the time of (i) 
opening any new account that is different from the retail investor's 
existing account(s); (ii) recommending that the retail investor roll 
over assets from a retirement account into a new or existing account or 
investment; or (iii) recommending or providing a new brokerage or 
investment advisory service or investment that does not necessarily 
involve the opening of a new account and would not be held in the 
existing account.\1293\ The adviser will be required to post a current 
version of its relationship summary prominently on its public website 
(if it has one), and will be required to communicate any changes in an 
amended relationship summary to retail investors who are existing 
clients within 60 days, instead of 30 days as proposed, after the 
amendments are required to be made and without charge.\1294\ The 
investment adviser also must deliver a current relationship summary to 
each retail investor within 30 days upon request. In a change from the 
proposal, an adviser must make a copy of the relationship summary 
available upon request without charge, and where a relationship summary 
is delivered in paper format, the adviser may link to additional 
information by including URL addresses, QR codes, or other means of 
facilitating access to such information.\1295\ The adviser must also 
include a telephone number where retail investors can request up-to-
date information and a copy of the relationship summary.\1296\
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    \1293\ We are adopting these requirements instead of the 
proposed requirements that advisers deliver the relationship summary 
to existing retail investor clients before or at the time of opening 
a new account that is different from the retail investor's existing 
account or changes are made to the retail investor's existing 
account(s) that would ``materially change'' the nature or scope of 
the firm's relationship with the retail investor. See Proposing 
Release, supra footnote 5 at Section II.C.2.
    \1294\ The communication can be made by delivering the 
relationship summary or by communicating the information through 
another disclosure that is delivered to the retail investor.
    \1295\ Additionally, we are adopting the instruction that if a 
relationship summary is delivered in paper format as part of a 
package of documents, the firm must ensure that the relationship 
summary is the first among any documents that are delivered at that 
time, substantially as proposed. See supra footnote 701.
    \1296\ This differs from the proposal, which required only firms 
that do not have a public website to include a toll-free number that 
retail investors may call to request documents. See supra footnote 
609.

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[[Page 33610]]

    As discussed further below, we received comments that our estimated 
burdens for delivery of the relationship summary were too low. Some of 
these comments focused on the administrative and operational burdens 
related to monitoring for changes that would ``materially change'' the 
nature and scope of the relationship and thereby require delivery to 
existing clients and customers.\1297\ One commenter also argued that 
imposing different delivery requirements for the Form ADV, Part 2 
brochure and the relationship summary would create substantial 
administrative burdens specifically for investment advisers.\1298\ 
Other comments focused on the recordkeeping burdens related to the 
requirement to deliver the relationship summary to a new or prospective 
retail investor.\1299\ As discussed further below, we made changes to 
the proposal to require more specific triggers for initial delivery and 
additional delivery to existing customers in order to replace the 
requirements in response to comments. We discuss below the specific 
separate delivery requirements and modifications.
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    \1297\ See, e.g., Cambridge Letter; SIFMA Letter; LPL Financial 
Letter.
    \1298\ Pickard Djinis and Pisarri Letter.
    \1299\ See supra footnotes 803-808.
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    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 will 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 will use the information to 
determine eligibility for registration with us and to manage our 
regulatory and examination programs. This collection of information 
will be found at 17 CFR 275.204-5 and will be mandatory. Responses will 
not be kept confidential.
1. Respondents: Investment Advisers
    The likely respondents to this information collection will be the 
approximately 8,235 investment advisers registered with the Commission 
that will be required to deliver a relationship summary per new rule 
204-5. We also note that these figures include the 318 registered 
broker-dealers that are dually registered as investment advisers.\1300\
---------------------------------------------------------------------------

    \1300\ See supra footnote 863 and accompanying text.
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2. Initial and Annual Burdens
a. Posting of the Relationship Summary to Website
    Under new rule 204-5, advisers will be required to post a current 
version of their relationship summary prominently on their public 
website (if they have one). In the Proposing Release, we estimated that 
each adviser will incur 0.5 hours to prepare the posted relationship 
summary, such as to ensure proper electronic formatting and to post the 
disclosure to the adviser's website, if the adviser has one.\1301\ 
Although we did not receive any comments regarding burdens associated 
with posting of the relationship summary to a public website, we are 
increasing our estimate of the time from 0.5 to 1.5 hours based on the 
staff's experience.\1302\ We do not anticipate that investment advisers 
will incur additional external costs to post the relationship summary 
to the adviser's website because advisers without a public website will 
not be required to establish or maintain one, and advisers with a 
public website have already incurred external costs to create and 
maintain their websites. Additionally, external costs for the 
preparation of the relationship summary are already included for the 
collection of information estimates for Form ADV, in Section A.2.b, 
above.
---------------------------------------------------------------------------

    \1301\ Proposing Release, supra footnote, 5 at section V.C.2.a.
    \1302\ See e.g., Optional internet Availability of Investment 
Company Shareholder Reports, Investment Company Act Release No. 
33115 (June 5, 2018) [83 FR 29158 (Jun. 22, 2018)] (estimating that 
funds that already post shareholder reports on their websites will 
require a half hour burden per fund to comply with the annual 
compliance and posting requirements of rule 30e-3, and funds that do 
not already post shareholder reports to their websites will require 
one and half hours to post the required documents online). Posting 
of the relationship summary under rule 204-5 pertains to one 
document, which is similar to the shareholder report posting to 
which rule 30e-3 applies.
---------------------------------------------------------------------------

    Based on IARD system data, 91.6% of investment advisers with 
individual clients report having at least one public website.\1303\ 
Therefore, we estimate that 91.6% of the 8,235 existing and 656 newly 
registered investment advisers with relationship summary obligations 
will incur a total of 12,216 aggregate burden hours to post 
relationship summaries to their websites,\1304\ with a monetized cost 
of $757,407.\1305\ 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.\1306\ 
Therefore, the total annual aggregate hourly burden related to the 
initial posting of the relationship summary is estimated to be 4,072 
hours, with a monetized cost of $252,469.\1307\ We did not receive 
comments regarding burdens associated with posting of the relationship 
summary to a public website.
---------------------------------------------------------------------------

    \1303\ We estimated in the Proposing Release that 91.1 of 
investment advisers with individual clients report at least one 
public website, based on IARD system data as of December 31, 2017. 
See Proposing Release, supra footnote 5 at Section V.C.1.
    \1304\ 1.5 hours to prepare and post the relationship summary x 
91.6% x (8,235 existing advisers + 656 newly-registered advisers 
with relationship summary obligations) = 12,216 hours.
    \1305\ 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 $62 per hour. 
1.5 hours per adviser x $62 = $93 in monetized costs per adviser. 
$93 per adviser x 91.6% x (8,235 existing advisers + 656 newly 
registered advisers) = $757,407 total aggregate monetized cost.
    \1306\ See 2016 Form ADV Paperwork Reduction Analysis, supra 
footnote 1209.
    \1307\ 12,216 hours/3 years = 4,072 hours annually. $757,407/3 
years = $252,469 in annualized monetized costs.
---------------------------------------------------------------------------

b. Delivery to Existing Clients
(1) One-Time Initial Delivery to Existing Clients
    The burden for this new rule is based on each adviser with retail 
investors having, on average, an estimated 3,985 clients who are retail 
investors.\1308\ 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 2A 
brochures and brochure supplements to their clients.\1309\ As with the 
estimates for rule 204-3, we estimate that advisers will require 
approximately 0.02 hours to deliver the relationship summary to each 
client.\1310\ We did not receive comments on the burdens specific to 
delivering the relationship summary to

[[Page 33611]]

existing clients under new Rule 204-5. We estimate the total burden 
hours for 8,235 advisers for initial delivery of the relationship 
summary to existing clients to be 79.7 hours per adviser, or 708,613 
total aggregate hours, for the first year after the rule is in 
effect,\1311\ with a monetized cost of $4,941 \1312\ per adviser or 
$43,930,431 in aggregate.\1313\ Amortized over three years, the total 
annual hourly burden is estimated to be 26.57 hours per adviser, or 
236,204 annual hours in aggregate,\1314\ with annual monetized costs of 
$1,647 per adviser, or $14,643,477 in aggregate.\1315\ We do not expect 
that investment advisers will incur external costs for the initial 
delivery of the relationship summary to existing clients because we 
estimate that advisers will make such deliveries along with another 
required delivery, such as an interim or annual update to the Form ADV 
Part 2A.
---------------------------------------------------------------------------

    \1308\ This estimate is based on IARD system data as of December 
31, 2018.
    \1309\ See Brochure Adopting Release, supra footnote 576, at 75 
FR at 49259.
    \1310\ 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 footnote 576, at 75 FR at 49259 The burden for 
preparing relationship summaries is already incorporated into the 
burden estimate for Form ADV discussed above.
    \1311\ (0.02 hours per client x 3,985 retail clients per 
adviser) = 79.7 hours per adviser. 79.7 hours per adviser x (8,235 
existing advisers + 656 newly registered advisers) = 708,613 total 
aggregate hours.
    \1312\ 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 $62 per hour. 79.7 hours per adviser x $62 = 
$4,941 in monetized costs per adviser. We estimate that advisers 
will not incur any incremental postage costs because we estimate 
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.
    \1313\ $4,941 in monetized costs per adviser x (8,235 existing 
advisers + 656 newly registered advisers) = $43,930,431 in total 
aggregate costs.
    \1314\ 79.7 initial hours per adviser/3 = 26.57 total annual 
hours per adviser. 708,613 initial aggregate hours/3 = 236,204 total 
annual aggregate hours.
    \1315\ $4,941 in monetized costs per adviser/3 = $1,647 
annualized monetized cost per adviser. $43,930,431 initial aggregate 
monetized cost/3 = $14,643,477 in total annual aggregate monetized 
cost.
---------------------------------------------------------------------------

(2) Additional Delivery to Existing Clients
    As discussed in Section II.C.3.c above, the proposed instructions 
would have required investment advisers to deliver the relationship 
summary to existing retail investor clients before or at the time firms 
open a new account that is different from the retail investor's 
existing account or changes are made to the retail investor's existing 
account(s) that would ``materially change'' the nature or scope of the 
firm's relationship with the retail investor. In response to comments 
seeking additional clarity on when the ``materially change'' 
requirement would apply, and expressing concerns that there will be 
additional supervisory, administrative, and operational processes 
required, and burdens imposed, we replaced the ``materially change'' 
requirement with more concrete delivery triggers that firms could more 
easily implement based on their existing systems and processes.\1316\
---------------------------------------------------------------------------

    \1316\ See supra footnotes 758-763 and accompanying text.
---------------------------------------------------------------------------

    Investment advisers will be required to deliver the relationship 
summary to existing clients before or at the time they open a new 
account that is different from the retail investor's existing 
account(s), as proposed. In addition, in a change from the proposal, 
delivery will be required before or at the time the adviser (i) 
recommends that the retail investor roll over assets from a retirement 
account into a new or existing account or investment, or (ii) 
recommends or provides a new brokerage or investment advisory service 
or investment that does not necessarily involve the opening of a new 
account and would not be held in the existing account. We are adopting 
these two triggers instead of the proposed requirement to deliver the 
relationship summary before or at the time changes are made to the 
existing account that would ``materially change'' the nature and scope 
of the relationship to address commenters' requests for additional 
guidance or examples of what would constitute a ``material change.'' 
\1317\ Commenters also described administrative and operational burdens 
arising from this requirement and argued that our estimated burdens 
were too low.\1318\ One commenter asserted that firms would be required 
to build entirely new operational and supervisory processes to identify 
asset movements that could trigger a delivery requirement.\1319\ 
Another commenter noted the challenges of designing a system that 
distinguishes non-ordinary course events from routine account 
changes.\1320\
---------------------------------------------------------------------------

    \1317\ See Prudential Letter; TIAA Letter; Cambridge Letter; 
SIFMA Letter; LPL Financial Letter; Institute for Portfolio 
Alternatives Letter.
    \1318\ See, e.g., SIFMA Letter; LPL Financial Letter.
    \1319\ See SIFMA Letter.
    \1320\ See LPL Letter.
---------------------------------------------------------------------------

    As discussed above, we replaced the ``materially change'' 
requirement with more specific triggers to be clearer about when a 
relationship summary must be delivered.\1321\ While these specific 
triggers will still impose operational and supervisory burdens on 
firms, we believe that they are more easily identified and monitored, 
such that firms will not incur significant burdens as described by 
commenters to implement entirely new supervisory, administrative, and 
operational processes needed to monitor events that cause a material 
change. However, recognizing that some additional processes will be 
necessary to implement these delivery triggers, we are increasing our 
burden estimate from 0.02 to 0.04 hours. We now estimate that each 
adviser will incur 16 hours per year to deliver the relationship 
summary in these types of situations, and that delivery under these 
circumstances will take place among 10% of an adviser's retail 
investors annually.\1322\ We will therefore estimate a total annual 
aggregate hours of 142,256,\1323\ with a monetized cost of $992 per 
adviser \1324\ and $8,818,872 in aggregate.\1325\
---------------------------------------------------------------------------

    \1321\ These more specific triggers are intended to address 
circumstances that the proposed ``materially change'' sought to 
address. See supra footnote 761 and accompanying text.
    \1322\ 10% of 3,985 retail clients per adviser x .04 hours to 
deliver the relationship summary = 16 hours per adviser.
    \1323\ 16 hours x (8,235 existing advisers + 656 new advisers) = 
142,256 total aggregate hours.
    \1324\ 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 $62 per hour. 
16 hours per adviser x $62 = $992 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 estimate 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.
    \1325\ $992 in monetized costs per adviser x (8,235 existing 
advisers + 656 newly registered advisers) = $8,819,872 in total 
aggregate costs.
---------------------------------------------------------------------------

(3) Posting of Amended Relationship Summaries to websites and 
Communicating Changes to Amended Relationship Summaries, Including by 
Delivery
    Investment advisers will be required to amend their relationship 
summaries within 30 days when any of the information becomes materially 
inaccurate. Investment advisers also will be required to communicate 
any changes in an amended relationship summary to existing clients who 
are retail investors within 60 days, instead of 30 days as proposed, 
after the updates are required to be made and without charge. We do not 
expect this change to increase the PRA estimates.\1326\ The 
communication can be made by delivering the relationship summary or 
through another disclosure that is

[[Page 33612]]

delivered to the retail investor. This requirement is a change from the 
proposed requirement but is substantively similar.\1327\ Commenters did 
not comment on the estimated burden. We have determined not to change 
the burden relative to the proposal.
---------------------------------------------------------------------------

    \1326\ As discussed in Section V.A.2.c., we have increased the 
burden estimates for preparing amendments to the relationship 
summary, acknowledging, among other things, that firms will incur 
additional burdens to prepare and file amendments as a result of the 
instructions that firms preparing amendments highlight the most 
recent changes, and that additional disclosure showing the revised 
text be attached as an exhibit to the unmarked relationship summary.
    \1327\ The proposed instructions would have required firms to 
communicate updated information by delivering the amended 
relationship summary or by communicating the information another 
way. The revised instruction will eliminate the wording ``another 
way'' and will clarify that the communication can be made through 
another disclosure that is delivered to the retail investor. See 
supra footnote 767.
---------------------------------------------------------------------------

    Based on the historical frequency of amendments made on Form ADV 
Parts 1 and 2, we estimate that on average, each adviser preparing a 
relationship summary will likely amend the disclosure an average of 
1.71 times per year.\1328\ We are not changing the 0.5 hours estimates 
to post the amendments to a public website, consistent with our 
estimates at proposal. Using the same percentage of investment advisers 
reporting public websites, 91.6% of 8,235 advisers will incur a total 
annual burden of 0.86 hours per adviser, or 6,487 hours in 
aggregate,\1329\ to post the amended relationship summaries to their 
website. This translates into an annual monetized cost of $53.32 per 
adviser, or $402,207 in the aggregate for existing registered advisers 
with relationship summary obligations.\1330\
---------------------------------------------------------------------------

    \1328\ We estimated in the Proposing Release that each adviser 
preparing a relationship summary will likely amend the disclosure an 
average 1.81 times based on IARD system data as of December 31, 
2017. See Proposing Release, supra footnote 5 at section 
V.C.2.b.iii. We are updating the average number to 1.71 times per 
year based on IARD system data as of December 31, 2018.
    \1329\ 0.5 hours to post the amendment x 1.71 amendments 
annually = 0.86 hours per adviser annually to post amendments to the 
website. 0.86 x 8,235 existing advisers amending the relationship 
summary x 91.6% of advisers with public websites = 6,487 aggregate 
annual hours to post amendments of the relationship summary.
    \1330\ 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 $62 per 
hour. 0.86 hours per adviser x $62 = $53.32 per adviser. $53.32 per 
adviser x 91.6% x 8,235 existing advisers = $402,207 in annual 
monetized costs.
---------------------------------------------------------------------------

    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. We did not receive 
comments on this estimate. We believe that it is likely that the other 
50% of advisers will incorporate all of the updated information in 
their Form ADV Part 2, like the summary of material changes or other 
disclosures, which they are already obligated to deliver in order to 
avoid having to deliver two documents. We estimate a burden of 561,162 
hours,\1331\ or 136.29 hours per adviser,\1332\ at a monetized cost of 
$34,792,044 in aggregate,\1333\ or $8,450 per adviser,\1334\ for the 
50% of advisers that choose to deliver amended relationship summaries 
in order to communicate updated information.\1335\
---------------------------------------------------------------------------

    \1331\ 8,235 advisers amending the relationship summary x 3,985 
retail clients per adviser x 50% delivering the amended relationship 
summary to communicate updated information x 0.02 hours per delivery 
x 1.71 amendments annually = 561,162 hours to deliver amended 
relationship summaries.
    \1332\ 3,985 retail clients per adviser x 0.02 hours per 
delivery x 1.71 amendments annually = 136.29 hours per adviser.
    \1333\ 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 $62 per hour. 
561,162 hours x $62 = $34,792,044. 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 estimate 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.
    \1334\ 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 
$62 per hour. 136.29 hours per adviser x $62 per hour = $8,450 per 
adviser.
    \1335\ For the other 50% of advisers that may choose to 
communicate updated information in another disclosure, we estimate 
no added burden because these advisers will be communicating the 
information in other disclosures they are already delivering like 
the Form ADV Part 2 brochure or summary of material changes.
---------------------------------------------------------------------------

    In a change from the proposal,\1336\ we are also adopting two 
requirements not included in the proposal. First, all firms will be 
required to make available a copy of the relationship summary upon 
request without charge. Second, in a relationship summary that is 
delivered in paper format, firms may link to additional information by 
including URL addresses, QR codes, or other means of facilitating 
access to such information.\1337\ We believe that these new 
requirements will increase the burden relative to the proposal for some 
firms that do not currently fulfill these types of disclosure requests, 
including, for example, additional costs associated with tracking 
delivery preferences related to making copies of the relationship 
summary available upon request, and printing and mailing costs for 
copies that are delivered in paper. We estimate that the 8,235 advisers 
with relationship summary obligations, on average, will require 0.5 
hours each annually to comply with this requirement. Therefore, we 
estimate that the 8,235 advisers will incur a total of 4,118 aggregate 
burden hours to make copies of the relationship summary available upon 
request,\1338\ with a monetized cost per adviser of $31, or $255,285 in 
aggregate monetized cost.\1339\ We acknowledge that the burden may be 
more or less than 0.5 hours for some advisers, but we believe that, on 
average, 0.5 hours is an appropriate estimate for calculating an 
aggregate burden for the industry for this collection of information.
---------------------------------------------------------------------------

    \1336\ See supra footnotes 699-701 and accompanying text.
    \1337\ We are adopting the instruction that if a relationship 
summary is delivered in paper format as part of a package of 
documents, it should be the first among any documents that are 
delivered at the same time, as proposed. See supra footnote 701.
    \1338\ 0.5 hours to make paper copies of the relationship 
summary available upon request x 8,235 advisers with relationship 
summary obligations = 4,118 hours.
    \1339\ Based on data from the SIFMA Office Salaries Report, we 
expect that the requirement for advisers to make paper copies of the 
relationship summary available upon request will most likely be 
performed by a general clerk at an estimated cost of $62 per hour. 
0.5 hours per adviser x $62 = $31 in monetized costs per adviser. 
$31 per adviser x 8,235 advisers with relationship summary 
obligations = $255,285 total aggregate monetized cost.
---------------------------------------------------------------------------

    We do not expect investment advisers to incur external costs in 
delivering amended relationship summaries or communicating the 
information in another way because we estimate that they will make this 
delivery with, or as part of, other disclosures required to be 
delivered, such as an interim or annual update to Form ADV. We did not 
receive comments on this assumption in the proposal.
c. Delivery to New Clients or Prospective New Clients
    Data from the IARD system indicate that of the 13,299 advisers 
registered with the Commission, 8,235 have retail investors, and on 
average, each has 3,985 clients who are retail investors.\1340\ As 
proposed, we estimate that the client base for investment advisers will 
grow by approximately 4.5% annually.\1341\ Based on our experience with 
Form ADV Part 2, we estimate the annual hour burden for initial 
delivery of a relationship summary will be the same by paper or 
electronic format, at 0.02 hours for each

[[Page 33613]]

relationship summary,\1342\ or 3.6 annual hours per adviser.\1343\ 
Therefore, we estimate that the aggregate annual hour burden for 
initial delivery of the relationship summary to new clients will be 
29,646 hours,\1344\ at a monetized cost of $1,838,052, or $223 per 
adviser.\1345\
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    \1340\ This average is based on advisers' responses to Item 5 of 
Part 1A of Form ADV as of December 31, 2018.
    \1341\ In the Proposing Release, we determined this estimate 
based on IARD system data. See Proposing Release, supra footnote 5 
at section V.C.c. 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. We did not receive comments on 
this estimate.
    \1342\ 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 footnote 576.
    \1343\ 3,985 clients per adviser with retail clients x 4.5% = 
179 new clients per adviser. 179 new clients per adviser x 0.02 
hours per delivery = 3.6 hours per adviser for delivery of a 
relationship summary to new or prospective new clients.
    \1344\ 3.6 hours per adviser for delivery obligation to new or 
prospective clients x 8,235 advisers = 29,646 hours.
    \1345\ 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 
$62 per hour. 29,646 hours x $62 = $1,838,052. We estimate that 
advisers will not incur any incremental postage costs to deliver the 
relationship summary to new or prospective clients because we 
estimate that advisers will make the delivery along with other 
documentation normally provided in such circumstances, such as Form 
ADV Part 2. $1,838,052/8,235 investment advisers = $223 per adviser.
---------------------------------------------------------------------------

    As in the Proposing Release, we continue to estimate that 
investment advisers will not incur external costs to deliver the 
relationship summary to new or prospective clients because they 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. We did not receive comments 
regarding the burdens for delivering the relationship summary to 
prospective clients that eventually become clients.
d. Total New Initial and Annual Burdens
    All together, we estimate the total collection of information 
burden for new rule 204-5 to be 983,945 annual aggregate hours per 
year,\1346\ or 120 hours per respondent,\1347\ for a total annual 
aggregate monetized cost of $61,003,406,\1348\ or $7,408 \1349\ per 
adviser.
---------------------------------------------------------------------------

    \1346\ 4,072 annual hours for posting initial relationship 
summaries to adviser websites + 236,204 annual hours for initial 
delivery to existing clients + 142,256 hours for delivery to 
existing clients based on material changes to accounts or scope of 
relationship + 6,487 annual hours to post amended relationship 
summary to website + 561,162 hours for delivery to existing clients 
to communicate updated information in amended relationship summaries 
+ 29,646 hours for delivery to new or prospective clients + 4,118 
hours to make paper copies of the relationship summary available 
upon demand = 983,945 annual total hours for investment advisers to 
post and deliver the relationship summary under proposed rule 204-5.
    \1347\ 983,945 hours (initial and other deliveries)/8,235 
advisers = 120 hours per adviser.
    \1348\ $252,469 for posting initial relationship summaries to 
adviser websites + $14,643,477 for initial delivery to existing 
clients + $8,819,872 for delivery to existing clients based on 
material changes to accounts or scope of relationship + $402,207 to 
post amended relationship summary to website + $34,792,044 for 
delivery to existing clients to communicate updated information in 
amended relationship summaries + $1,838,052 for delivery to new or 
prospective clients + $255,285 for making paper copies of the 
relationship summary available upon demand = $61,003,406 in total 
annual aggregate monetized cost for investment advisers to post and 
deliver the relationship summary under proposed rule 204-5.
    \1349\ $61,003,406/8,235 advisers = $7,408 per adviser.
---------------------------------------------------------------------------

D. Form CRS and Rule 17a-14 under the Exchange Act

    New rule 17a-14 under the Exchange Act [17 CFR 240.17a-14] and Form 
CRS [17 CFR 249.640] will require a broker-dealer that offers services 
to retail investors to prepare and 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 will deliver the relationship summary 
to both existing customers and new or prospective customers who are 
retail investors. In a change from the proposal, broker-dealers will 
file the relationship summary through Web CRD[supreg] instead of EDGAR. 
We are also requiring that all relationship summaries be filed with 
machine-readable headings, in a change from the proposal, as well as in 
a text-searchable format as proposed.
    New 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 the relationship 
summary 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 will be found at 17 CFR 
249.640 and will be mandatory. Responses will not be kept confidential.
    As discussed in Sections I and II of this release, we received 
comments that addressed whether the relationship summary is necessary 
for broker-dealers, and whether we could further minimize the burden of 
the proposed collections of information. One commenter specifically 
addressed the accuracy of our burden estimates for the proposed 
collections of information, suggesting that our estimates were too low 
because compliance professionals estimated it would take 80-500 hours 
to prepare, deliver, and file the relationship summary, depending on 
the firm's size and business model.\1350\ Others commented more broadly 
that the implementation costs of the relationship summary would be 
higher than we estimated in the Proposing Release.\1351\ We have 
considered these comments and are increasing our PRA burden estimates 
from 15 hours to 40 hours for broker-dealers to prepare and file the 
relationship summary. We also modified several substantive requirements 
to mitigate some of these estimated increased costs relative to the 
proposal.
---------------------------------------------------------------------------

    \1350\ See NSCP Letter.
    \1351\ Some commenters argued that the cost to implement Form 
CRS and Regulation Best Interest would be high. See, e.g., Raymond 
James Letter; CCMC Letter (investor polling results); SIFMA Letter.
---------------------------------------------------------------------------

1. Respondents: Broker-Dealers
    The respondents to this information collection will be the broker-
dealers registered with the Commission that will be required to 
prepare, file, and deliver a relationship summary in accordance with 
new rule 17a-14 under the Exchange Act [17 CFR 240.17a-14]. As of 
December 31, 2018, there were 2,766 broker-dealers registered with the 
Commission that reported sales to retail customer investors,\1352\ and 
therefore likely will be required to prepare and deliver the 
relationship summary.\1353\ We also note that these include 318 broker-
dealers that are dually registered as investment advisers.\1354\ We did 
not receive comments related to the methodology used for estimating the 
number of broker-dealers that will be subject to these requirements. We 
are maintaining the methodology we used in the Proposing Release and 
are updating our estimates to reflect the

[[Page 33614]]

number of broker-dealers since the last burden estimate.
---------------------------------------------------------------------------

    \1352\ See supra footnote 867 and accompanying text. Retail 
sales activity is identified from Form BR (see supra footnote 861, 
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 believe that many firms will just mark ``sales'' if they 
have both retail and institutional activity. However, this may 
capture some broker-dealers that do not have retail activity, 
although we are unable to estimate that frequency.
    \1353\ For purposes of Form CRS, a ``retail investor'' will be 
defined as: a natural person, or the legal representative of such 
natural person, who seeks to receive or receives services primarily 
for personal, family or household purposes.
    \1354\ See supra footnote 863 and accompanying text.
---------------------------------------------------------------------------

    Some of 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 amendments 
to Form ADV and new rule 204-5, discussed in Sections V.A.2.a and V. 
C.2 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 using both IARD and Web CRD[supreg], and to 
deliver to both investment advisory clients and brokerage customers, to 
the extent those groups of retail investors do not overlap. In 
addition, dual registrants may provide different services, charge 
different fees, and have different conflicts on the advisory and 
broker-dealer sides such that the burden of preparing the relationship 
summary on the broker-dealer side may not be substantially reflected in 
the burden for preparing the relationship summary on the advisory side. 
Therefore, although treating dually registered broker-dealers in this 
way may be over-inclusive, we base our burden estimates for rule 17a-14 
and the relationship summary on 2,766 broker-dealers with relationship 
summary obligations, including those dually registered as broker-
dealers. \1355\
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    \1355\ The burden estimates for dual registrants to prepare and 
file the relationship summary is accounted for in the burden 
estimates for Form ADV and under Exchange Act rule 17a-14. For 
example, a dual registrant that prepares an initial relationship 
summary that covers both its advisory business and broker-dealer 
business has an estimated burden of 60 hours amortized (20 hours to 
prepare and file relationship summary related to the advisory 
business + 40 hours to prepare and file relationship summary related 
to the broker-dealer business).
---------------------------------------------------------------------------

2. Initial and Annual Burdens
a. Initial Preparation, Filing, and Posting of Relationship Summary
    As discussed above in Section II, firms will be required to prepare 
and file a relationship summary summarizing specific aspects of their 
brokerage services that they offer to retail investors. Unlike 
investment advisers, which already prepare Form ADV Part 2A brochures 
and have information readily available to prepare the relationship 
summary, broker-dealers will be required for the first time to prepare 
a disclosure that contains all the information required by the 
relationship summary.
    In the Proposing Release, we estimated that the initial first year 
burden for preparing and filing the relationship summary for broker-
dealers would be 15 hours per registered broker-dealer and an 
additional 0.5 hours to prepare the relationship summary for posting on 
its website, if it has one. Several commenters said that our estimated 
burdens were too low.\1356\ One commenter specifically argued that 
preparing, delivering, and filing the relationship summary would take 
from 80 to 500 hours, based on input from compliance professionals, and 
noted there would be additional costs that are hard to quantify, 
including human relations and information technology programming.\1357\ 
Commenters also said the relationship summary would result in 
additional compliance burdens, including training.\1358\
---------------------------------------------------------------------------

    \1356\ See, e.g., NSCP Letter; see also CCMC Letter (costs to 
implement the proposal were underestimated and greater than 40% of 
firms surveyed anticipate having to spend a moderate or substantial 
amount to implement Regulation Best Interest and Form CRS); Raymond 
James Letter (noting the significant implementation costs of 
Regulation Best Interest and Form CRS for the industry); SIFMA 
Letter (stating that implementation costs of Regulation Best 
Interest and Form CRS would be significant).
    \1357\ See NSCP Letter.
    \1358\ See NSCP Letter (stating that a minimum of two hours of 
firm level training or two hours of training per independent 
registered representative or adviser will be required prior to Form 
CRS implementation).
---------------------------------------------------------------------------

    We are revising our estimate of the time that it would take each 
broker-dealer to prepare and file the relationship summary in the first 
year from 15 to 40 hours in light of these comments and the changes we 
are making to the proposed relationship summary. For example, in the 
Proposing Release, we estimated that it would take firms a shorter 
amount of time to prepare the relationship summary than a more 
narrative disclosure due to the standardized nature and prescribed 
language of the relationship summary. As discussed above, the final 
instructions require less prescribed wording relative to the proposal 
and require broker-dealers to draft their own summaries for most of the 
sections. In addition and in a change from the proposal, we now are 
requiring that all relationship summaries be filed with machine-
readable headings, as well as text-searchable format as proposed. We 
acknowledge that these changes will increase cost burdens relative to 
the proposal because broker-dealers have to develop their own wording 
and design, as well as implement machine-readable headings to comply 
with these requirements.
    The relationship summary will also require more layered disclosures 
relative to the proposal and will encourage the use of electronic 
formatting and graphical, text, online features to facilitate access to 
other disclosures that provide additional detail. Although broker-
dealers are currently required to disclose certain information about 
their services and accounts to their retail investors,\1359\ broker-
dealers are not currently 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 comparable to investment 
advisers' Form ADV Part 2A. Broker-dealers will bear the cost of 
drafting a new relationship summary and cross-referencing or 
hyperlinking to additional information. The higher estimated burden 
estimate also reflects our acknowledgement that it will take firms 
longer to draft certain disclosures than we estimated in the Proposing 
Release, such as answers to ``conversation starters'' that broker-
dealers providing services only online without a particular individual 
with whom a retail investor can discuss these questions must include on 
their website. We believe these factors and the changes we made to the 
proposal will increase the burden to prepare a relationship summary 
relative to the proposal.
---------------------------------------------------------------------------

    \1359\ See, e.g., 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).
---------------------------------------------------------------------------

    We are also changing the filing system for broker-dealers as 
compared to the proposal. Broker-dealers will file Form CRS through Web 
CRD[supreg] instead of EDGAR as proposed, but we believe that this 
change will reduce the estimated burden for filing with the Commission, 
relative to the proposal. Broker-dealers already submit registration 
filings on Web CRD[supreg] so they will not incur additional costs to 
access the system.\1360\
---------------------------------------------------------------------------

    \1360\ This reduction in the filing burden is offset by the 
increased burden to prepare the relationship summary, resulting in a 
higher total burden.
---------------------------------------------------------------------------

    We are estimating the same hourly burden for standalone broker-
dealers and broker-dealers that are dually registered as investment 
advisers because we are counting dually registered firms in the burden 
calculation for the Advisers Act rule that requires the relationship 
summary for investment advisers.\1361\ We recognize that the burden for 
some broker-dealers will exceed our estimate and the burden for others 
will be less because broker-dealers vary in the size

[[Page 33615]]

and complexity of their business models, but we do not believe that the 
range could be as high as suggested by some commenters.\1362\ Unlike 
investment advisers, which already prepare Form ADV Part 2A brochures 
and have information readily available to prepare the relationship 
summary, broker-dealers will be required for the first time to prepare 
disclosure that contains all the information required by the 
relationship summary.
---------------------------------------------------------------------------

    \1361\ See supra footnote 1220.
    \1362\ See NSCP Letter (estimating that the time required to 
prepare, deliver, and file Form CRS would be anywhere from 80 to 500 
hours).
---------------------------------------------------------------------------

    We recognize that the burden on some broker-dealers might be 
significant, especially in the initial preparation and filing of the 
relationship summary and thus will require additional burdens than what 
we estimated in the Proposing Release. Accordingly, we are increasing 
the estimate from 15 to 40 hours in the first year for a broker-
dealer's initial preparation and filing of the relationship summary, 
which is higher than the estimated burden for investment 
advisers.\1363\ We estimate that the total burden for broker-dealers to 
prepare and file the relationship summary will be 110,640 hours,\1364\ 
for a monetized value of $30,204,720.\1365\ The initial burden will be 
amortized over three years to arrive at an annual burden for broker-
dealers to prepare and file the relationship summary. Therefore, the 
total annual aggregate hour burden for registered broker-dealers to 
prepare and file the relationship summary will be 36,880 hours, or 
13.33 hours per broker-dealer,\1366\ for an annual monetized cost of 
$10,068,240, or $3,640 per broker-dealer.\1367\
---------------------------------------------------------------------------

    \1363\ See infra footnote 1366. Amortizing the 40 hour burden 
imposed by the relationship summary over a three-year period will 
result in an average annual burden of 13.33 hours per year for each 
of the 2,766 broker-dealers with relationship summary obligations.
    \1364\ 2,766 x 40.0 hours/3 = 36,880 total hours.
    \1365\ 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 $237 and $309 per hour, respectively. (0.5 x 110,640 hours x 
$237) + (0.5 x 110,640 hours x $309) = $30,204,720.
    \1366\ 110,640 hours for preparing and filing/3 years = 36,880 
total aggregate annual hour burden to prepare and file relationship 
summary. 36,880 hours/2,766 broker-dealers with retail accounts = 
13.33 hours annually per broker-dealer.
    \1367\ $30,204,720 total initial aggregate monetized cost for 
preparation and filing/3 = $10,068,240 total annual monetized cost 
for preparation and filing the relationship summary. $10,068,240/
2,766 broker-dealers subject to relationship summary obligations = 
$3,640 per broker-dealer.
---------------------------------------------------------------------------

    As proposed, broker-dealers will be required to post a current 
version of their relationship summary prominently on their public 
website (if they have one). In the Proposing Release, we estimated that 
each broker-dealer will incur 0.5 hours to prepare the posted 
relationship summary, such as to ensure proper electronic formatting 
and to post a current version of the relationship summary on the 
broker-dealer's website, if it has one. Although we did not receive any 
comments regarding burdens associated with posting of the relationship 
summary to a public website, we are increasing our estimate of the time 
from 0.5 to 1.5 hours based upon the staff's experience.\1368\ We 
believe that the amount of time needed to prepare the relationship 
summary for posting, including ensuring proper formatting and posting 
it on the website, will not vary significantly from the time needed by 
investment advisers. We do not anticipate that broker-dealers will 
incur additional external costs to post the relationship summary to the 
broker-dealer's website because broker-dealers without a public website 
will not be required to establish or maintain one, and broker-dealers 
with a public website have already incurred external costs to create 
and maintain their websites. As with investment advisers, we estimate 
that each broker-dealer will incur 1.5 hours to prepare the 
relationship summary for posting to its website. We estimate that the 
initial burden of posting the relationship summary to their websites, 
if they have one, will be 4,149 hours,\1369\ for a monetized value of 
$257,238.\1370\ The initial burden will be amortized over three years 
to arrive at an annual burden for broker-dealers to post the 
relationship summary to a public website. Therefore, the total annual 
aggregate hour burden for broker-dealers to post the relationship 
summary will be 1,383 hours, or 0.5 hours per broker-dealer,\1371\ for 
an annual monetized cost of $87,746, or $31 per broker-dealer.\1372\
---------------------------------------------------------------------------

    \1368\ See supra footnote 1302.
    \1369\ 1.5 hours x 2,766 broker-dealers = 4,149 hours to prepare 
and post relationship summary to the website.
    \1370\ 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 $62 
per hour. 4,149 hours x $62 = $257,238 total aggregate monetized 
cost.
    \1371\ 4,149 hours for posting to website/3 years = 1,383 total 
aggregate annual burden to prepare and file relationship summary. 
1,383 hours/2,766 broker-dealers with retail account = 0.5 hours 
annually per broker-dealer.
    \1372\ $257,238 total initial aggregate monetized cost for 
posting to website/3 = $85,746 total annual monetized cost for 
posting the relationship summary. $87,746/2,766 broker-dealers with 
retail accounts = $31 per broker-dealer.
---------------------------------------------------------------------------

    To arrive at an annual burden for preparing, filing, and posting 
the relationship summary, as for investment advisers, the initial 
burden will be amortized over a three-year period for broker-dealers. 
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, will be 38,263 hours, or 13.83 hours 
per broker-dealer,\1373\ for an annual monetized cost of $10,153,986, 
or $3,671 per broker-dealer.\1374\
---------------------------------------------------------------------------

    \1373\ 110,640 hours for preparing and filing + 4,149 hours for 
posting = 114,789 hours. 114,789/3 years = 38,263 total aggregate 
annual hour burden to prepare and file relationship summary. 38,263 
hours/2,766 broker-dealers with retail accounts = 13.83 hours 
annually per broker-dealer.
    \1374\ $30,204,720 total initial aggregate monetized cost for 
preparation and filing + $257,238 for posting to the website/3 = 
$10,153,986 total annual monetized cost for preparation, filing and 
posting the relationship summary. $10,153,968/2,766 broker-dealers 
subject to relationship summary obligations = $3,671 per broker-
dealer.
---------------------------------------------------------------------------

b. Estimated External Costs for Initial Preparation of Relationship 
Summary
    Under new rule 17a-14, broker-dealers will 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 to broker-dealers in 
the form of website set-up, maintenance, or licensing fees because they 
will 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 most broker-dealers will incur a one-
time initial cost for outside legal and consulting fees in connection 
with the initial preparation of the relationship summary.
    We estimated in the Proposing Release that an external service 
provider would spend 3 hours helping a broker-dealer prepare an initial 
relationship summary. While we received no specific comments on our 
estimate regarding external costs in the Proposing Release, one 
commenter suggested that there would be additional implementation costs 
such as legal advice, but that these costs are difficult to 
quantify.\1375\ Based on the concerns expressed by this commenter and 
the changes we are making to the relationship summary, for example, 
requiring less prescribed wording, we are increasing the estimate 
relative to the proposal from 3 to 5 hours. 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

[[Page 33616]]

the industry purposes of the PRA analysis, particularly given our 
experience with the burdens for Form ADV.\1376\
---------------------------------------------------------------------------

    \1375\ See NSCP Letter.
    \1376\ See supra footnote 1221.
---------------------------------------------------------------------------

    Although broker-dealers that will be subject to the relationship 
summary requirement may vary widely in terms of the size, complexity, 
and nature of their business, we believe that the strict page limits 
will make it unlikely that the amount of time, and thus cost, required 
for outside legal and compliance review will vary substantially among 
those broker-dealers who elect to obtain outside assistance.
    Most of the information required in the relationship summary is 
readily available to broker-dealers because the information required 
pertains largely to the broker-dealer's own business practices, and 
thus the information is likely more readily available to the broker-
dealer than to an external legal or compliance consultant. However, 
because broker-dealers are drafting a narrative disclosure for the 
first time, we anticipate that 50% of broker-dealers will seek the help 
of outside legal services and 50% of broker-dealers 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 will be $2,485.\1377\ We estimate that the 
initial per broker-dealer cost for compliance consulting services 
related to the preparation of the relationship summary will be 
$3,705.\1378\ Accordingly, we estimate that 1,383 broker-dealers will 
use outside legal services, for a total initial aggregate cost burden 
of $3,436,755,\1379\ and 1,383 broker-dealers will use outside 
compliance consulting services, for a total initial aggregate cost 
burden of $5,124,015,\1380\ resulting in a total initial aggregate cost 
burden among all respondents of $8,560,770, or $3,095 per broker-
dealer, for outside legal and compliance consulting fees related to 
preparation of the relationship summary.\1381\ Annually, this 
represents $2,853,590, or $1,032 per broker-dealer, when amortized over 
a three-year period.\1382\
---------------------------------------------------------------------------

    \1377\ External legal 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 
legal services cost approximately $497 per hour. $497 per hour for 
legal services x 5 hours per broker-dealer = $2,485. The hourly cost 
estimate of $497 is adjusted for inflation and based on our 
consultation with broker-dealers and law firms who regularly assist 
them in compliance matters.
    \1378\ 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 $741 
per hour. $741 per hour for outside consulting services x 5 hours 
per broker-dealer = $3,705.
    \1379\ 50% x 2,766 SEC registered broker-dealers = 1,383 broker-
dealers. $2,485 for legal services x 1,383 broker-dealers = 
$3,436,755.
    \1380\ 50% x 2,766 SEC registered broker-dealers = 1,383 broker-
dealers. $3,705 for compliance consulting services x 1,383 broker-
dealers = $5,124,015.
    \1381\ $3,436,755 + $5,124,015 = $8,560,770. $8,560,770/2,766 
broker-dealers = $3,095 per broker-dealer.
    \1382\ $8,560,770 initial aggregate monetized cost/3 years = 
$2,853,590 annually. $3,095 initial monetized cost per broker-
dealer/3 years = $1,032.
---------------------------------------------------------------------------

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. 
In the Proposing Release, we estimated that broker-dealers required to 
prepare and file a relationship summary would require 0.5 hours to 
amend and file the updated relationship summary, and 0.5 hours to post 
it to their website. We did not receive comments regarding hour burdens 
associated with preparing and filing amendments to the relationship 
summary. As discussed in section II.C.4 above, in a change from the 
proposal, we are adding a requirement that broker-dealers delivering 
updated relationship summaries to customers also highlight the most 
recent changes by, for example, marking the revised text or including a 
summary of material changes. To account for this change, we are 
increasing the annual burden to 1 hour per year for preparing and 
filing amendments to the relationship summary. We are not changing the 
proposed 0.5 hours estimate to post the amendments to a public website.
    Based on staff experience, we believe that many broker-dealers will 
update their relationship summary at a minimum once a year, after 
conducting an annual supervisory review, for example.\1383\ 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 estimate that broker-dealers will update 
their relationship summary, on average, twice a year. Thus, we estimate 
that broker-dealers will incur a total annual aggregate hourly burden 
of 5,532 hours per year to prepare and file amendments per year, and 
2,766 hours per year to post to their websites an estimated total of 
5,532 amendments per year.\1384\ We therefore estimate that for making 
and filing amendments to their relationship summaries, broker-dealers 
will incur an annual aggregate monetized cost of $1,510,236, or 
approximately $546 per broker-dealer to prepare and file 
amendments,\1385\ and an annual aggregate monetized cost of $171,492, 
or approximately $62 per broker-dealer to post the amendments.\1386\ In 
total, the aggregate annual monetized cost for broker-dealers to make, 
file, and post amendments will be $1,681,728, or approximately $608 per 
broker dealer.\1387\
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    \1383\ 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).
    \1384\ 2,766 broker-dealers amending relationship summaries x 2 
amendments per year = 5,532 amendments per year. 5,532 amendments x 
1 hour to amend and file = 5,532 hours. 2,766 broker-dealers x (0.5 
hours to post amendments to website x 2 amendments a year) = 2,766 
hours.
    \1385\ 5,532 total aggregate initial hour burden for amending 
relationship summaries. We believe that performance of this function 
will most likely be equally allocated between a senior compliance 
examiner and a compliance manager. Data from the SIFMA Management 
and Professional Earnings Report suggest that costs for these 
positions are $237 and $309 per hour, respectively. (5,532 hours x 
50% x $237 + 5,532 hours x 50% x $309 = $1,510,236. $1,510,236/2,677 
investment advisers = $546 per investment broker-dealer.
    \1386\ Based on data from the SIFMA Office Salaries Report, we 
expect that the posting will most likely be performed by a general 
clerk at an estimated cost of $62 per hour. 2,766 aggregate hours to 
post amendment x $62 = $171,492. $171,492/2,766 broker-dealers = $62 
in annual monetized costs.
    \1387\ $1,510,236 to prepare and file amendment + $171,492 to 
post the amendments = $1,681,728. $1,681,728/2,766 = $608.
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    We do not expect ongoing external legal or compliance consulting 
costs for the relationship summary.\1388\ Although broker-dealers will 
be required to amend the relationship summary within 30 days whenever 
any information becomes materially inaccurate, we expect that the 
amendments will require relatively minimal wording changes, given the 
relationship summary's page limitation and summary nature. We believe 
that broker-dealers will be more knowledgeable about the information to 
include in the amendments than outside legal or compliance consultants 
and will 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

[[Page 33617]]

preparation and review of relationship summary amendments.
---------------------------------------------------------------------------

    \1388\ But see NNCP Letter.
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d. Delivery of the Relationship Summary
    Rule 17a-14 under the Exchange Act will 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 earliest of: 
(i) A recommendation of an account type, a securities transaction or an 
investment strategy involving securities; (ii) placing an order for the 
retail investor; or (iii) the opening of a brokerage account for the 
retail investor. Broker-dealers also will 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 rule. Also with 
respect to existing customers, broker-dealers will deliver the most 
recent relationship summary before or at the time of (i) opening a new 
account that is different from the retail investor's existing 
account(s); or (ii) recommending that the retail investor roll over 
assets from a retirement account into a new or existing account or 
investment; or (iii) recommending or providing a new brokerage or 
investment advisory service or investment that does not necessarily 
involve the opening of a new account and would not be held in the 
existing account.
    As discussed above in Section II.C.3.a, broker-dealers will be 
required to post a current version of the relationship summary 
prominently on their public websites (if they have one), and will be 
required to communicate any changes in an amended relationship summary 
to retail investors who are existing clients or customers within 60 
days, instead of 30 days as proposed, after the amendments are required 
to be made and without charge.\1389\ Broker-dealers also must deliver a 
current relationship summary to each retail investor within 30 days 
upon request. In a change from the proposal, a broker-dealer must make 
available a copy of the relationship summary upon request without 
charge, and where a relationship summary is delivered in paper format, 
the broker-dealer may link to additional information by including URL 
addresses, QR codes, or other means of facilitating access to such 
information.\1390\ The broker-dealer must also include a telephone 
number where retail investors can request up-to-date information and 
request a copy of the relationship summary.\1391\
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    \1389\ The communication can be made by delivering the 
relationship summary or by communicating the information through 
another disclosure that is delivered to the retail investor.
    \1390\ Additionally, we are adopting the instruction that if a 
relationship summary is delivered in paper format as part of a 
package of documents, the firm must ensure that the relationship 
summary is the first among any documents that are delivered at that 
time, substantially as proposed. See supra footnotes 678-679.
    \1391\ This differs from the proposal, which required only firms 
that do not have a public website to include a toll-free number that 
retail investors may call to request documents. See supra footnote 
609.
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    As discussed further below, we received comments that our estimated 
burdens for delivery of the relationship summary were too low.\1392\ 
Some of these comments were focused on the delivery burdens related to 
the requirement to deliver a relationship summary to existing retail 
investors when changes are made to the existing account that would 
``materially change'' the nature and scope of the relationship.\1393\ 
Other comments focused on the recordkeeping burdens related to the 
requirement to deliver the relationship summary to a new or prospective 
retail investor.\1394\ As discussed further below, we made changes to 
the proposal to require more specific triggers for initial delivery and 
additional delivery to existing customers in order to replace the 
requirements in response to comments. We discuss below the specific 
separate delivery requirements and modifications.
---------------------------------------------------------------------------

    \1392\ See, e.g., SIFMA Letter.
    \1393\ See, e.g., Cambridge Letter; SIFMA Letter; LPL Financial 
Letter.
    \1394\ See infra footnote 1427.
---------------------------------------------------------------------------

(1) 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 2,766 broker-dealers 
that report retail activity have approximately 139 million customer 
accounts, and that approximately 73.5%, or 102.165 million, of those 
accounts belong to retail customers.\1395\ We estimate that, under the 
adopted rule, broker-dealers will send their relationship summary along 
with other required disclosures, such as periodic account statements, 
in order to comply with initial delivery requirements for the 
relationship summary.
---------------------------------------------------------------------------

    \1395\ See supra footnotes 857-865 and accompanying text. 2,766 
broker-dealers (including dually registered firms) report 139 
million customer accounts. Approximately 73.5% of registered broker-
dealers report retail customer activity; see supra footnote 861. 
Therefore, 73.5% x 139 million accounts = 102.165 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.
---------------------------------------------------------------------------

    As with investment advisers, we estimate that a broker-dealer will 
require no more than 0.02 hours to deliver the relationship summary to 
each existing retail investor under rule 17a-14. We did not receive 
comments on the burdens specific to delivering the relationship summary 
to existing clients. We will therefore estimate broker-dealers to incur 
an aggregate initial burden of 2,043,300 hours, or approximately 739 
hours per broker-dealer for the first year after the rule is in 
effect.\1396\ We expect the aggregate monetized cost for broker-dealers 
to make a one-time initial delivery of relationship summaries to 
existing customers to be $126,684,600.\1397\ Amortized over three 
years, the total annual hourly burden is estimated to be 681,100 hours, 
or approximately 246 hours per broker-dealer,\1398\ with annual 
monetized costs of $42,228,200 and $15,267, respectively.\1399\ We do 
not expect that broker-dealers will incur external costs for the 
initial delivery of the relationship summary to existing clients 
because we estimate that they will make such deliveries along with 
another required delivery, such as periodic account statements.
---------------------------------------------------------------------------

    \1396\ (0.02 hours per customer account x 102.165 million 
customer accounts) = 2,043,300 hours. The burden for preparing 
updated relationship summaries is already incorporated into the 
burden estimate for Form CRS discussed above. 2,043,300 hours/2,766 
broker-dealers = approximately 739 hours per broker-dealer.
    \1397\ 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 $62 per hour. 2,043,300 hours x $62 = 
$126,684,600. We estimate that broker-dealers will not incur any 
incremental postage costs because we estimate that they will make 
such deliveries with another mailing the broker-dealer was already 
delivering to clients, such as periodic account statements.
    \1398\ 2,043,300 initial aggregate hours/3 = 681,100 total 
annual aggregate hours. 739 initial hours per broker-dealer/3 = 246 
total annual hours per broker-dealer.
    \1399\ $126,684,600 initial aggregate monetized cost/3 = 
$42,228,200 annual aggregate monetized cost. $42,228,200/2,766 
broker-dealers = $15,267 annual monetized cost per broker-dealer.
---------------------------------------------------------------------------

(2) Additional Delivery to Existing Customers
    As discussed in Section II.C.3.c above, broker-dealers will be 
required to deliver the relationship summary to existing customers when 
opening a new account that is different from the retail investor's 
existing account(s), as proposed. In addition, in a change from the 
proposal, delivery will be required before or at the time the broker-
dealer (i)

[[Page 33618]]

recommends that the retail investor roll over assets from a retirement 
account into a new or existing account or investment, or (ii) 
recommends or provides a new brokerage or investment advisory service 
or investment that does not necessarily involve the opening of a new 
account and would not be held in the existing account. We are adopting 
these two triggers instead of the proposed requirement to deliver the 
relationship summary before or at the time changes are made to the 
existing account that would ``materially change'' the nature and scope 
of the relationship to address commenters' requests for additional 
guidance or examples of what would constitute a ``material change.'' 
\1400\ Commenters also described administrative and operational burdens 
arising from this requirement and argued that our estimated burdens 
were too low.\1401\ One commenter asserted that firms would be required 
to build entirely new operational and supervisory processes to identify 
asset movements that could trigger a delivery requirement.\1402\ 
Another noted the challenges of designing a system that distinguishes 
non-ordinary course events from routine account changes.\1403\
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    \1400\ See supra footnotes 758-763 and accompanying text.
    \1401\ See, e.g., LPL Financial Letter (stating that proposed 
re-delivery triggering events would not be easily identifiable and 
would present operational challenges and compliance costs).
    \1402\ See SIFMA Letter.
    \1403\ See LPL Financial Letter.
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    As discussed above, we replaced the ``materially change'' 
requirement with more specific triggers to be clearer about when a 
relationship summary must be delivered.\1404\ While these specific 
triggers will still impose operational and supervisory burdens on 
broker-dealers, we believe that they are more easily identified and 
monitored, such that firms will not incur significant burdens as 
described by commenters to implement entirely new supervisory, 
administrative, and operational processes needed to monitor events that 
cause a material change. However, recognizing that some additional 
processes will be necessary to implement these delivery triggers, we 
are increasing our burden estimate from 0.02 to 0.04 hours. We now 
estimate that each broker-dealer will incur 149 hours per year to 
deliver the relationship summary in these types of situations, and that 
delivery under these circumstances will take place among 10% of broker-
dealer's retail investors annually. We will therefore estimate broker-
dealers to incur a total annual aggregate burden of 408,660 hours, or 
148 hours per broker-dealer,\1405\ at an annual aggregate monetized 
cost of $25,336,920, or approximately $9,160 per broker-dealer.\1406\
---------------------------------------------------------------------------

    \1404\ See supra footnote 761 and accompanying text.
    \1405\ 10% of 102.165 million customers x 0.04 hours = 408,660 
hours. 408,660 hours/2,766 broker-dealers = 148 hours per broker-
dealer.
    \1406\ 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 
$62 per hour. 408,660 hours x $62 = $25,336,920. $25,336,920/2,766 
broker-dealers = $9,160 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 estimate 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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(3) Communicating Changes to Amended Relationship Summaries, Including 
by Delivery
    As discussed above, broker-dealers will be required to amend their 
relationship summaries within 30 days when any of the information 
becomes materially inaccurate. They must also communicate any changes 
in any new version of the relationship summary to retail investors who 
are existing customers within 60 days, instead of 30 days as proposed, 
after the updates are required to be made and without charge. We do not 
expect this change to increase the PRA estimates.\1407\ The 
communication can be made by delivering the relationship summary or by 
communicating the information through another disclosure to the retail 
investor. This requirement is a change from the proposed requirement 
but is substantively similar, and commenters did not comment on the 
estimated burden.\1408\ We have determined not to change the burden 
relative to the proposal.
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    \1407\ As discussed in Section V.D.2.c., we have increased the 
burden estimates for preparing amendments to the relationship 
summary, acknowledging, among other things, that firms will incur 
additional burdens to prepare and file amendments as a result of the 
instructions that firms preparing amendments highlight the most 
recent changes, and that additional disclosure showing the revised 
text be attached as an exhibit to the unmarked relationship summary.
    \1408\ The proposed instructions would have required firms to 
communicate updated information by delivering the amended 
relationship summary or by communicating the information another 
way. The revised instruction will eliminate the wording ``another 
way'' and will clarify that the communication can be made through 
another disclosure that is delivered to the retail investor. See 
supra footnotes 775-778 and accompanying text.
---------------------------------------------------------------------------

    Consistent with our discussion on broker-dealers' amendments to the 
relationship summary we are assuming that the broker-dealers with 
relationship summaries will amend them twice each year. We also 
estimate that 50% will choose to deliver the relationship summary to 
communicate the updated information. We did not receive comments on 
this estimate. As with investment advisers, we believe that it is 
likely that the other 50% of broker-dealers will incorporate all of the 
updated information in other disclosures, which they are already 
obligated to deliver in order to avoid having to deliver two documents. 
We estimate that broker-dealers will require 0.02 hours to make a 
delivery to each customer.\1409\ Therefore, the estimated burden for 
those broker-dealers choosing to deliver an amended relationship 
summary to meet this communication requirement will be approximately 
2,043,300 hours, or 739 hours per broker-dealer,\1410\ translating into 
a monetized cost of $126,684,600 in aggregate, or $45,801 per broker-
dealer.\1411\
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    \1409\ For the other 50% of broker-dealers that may choose to 
communicate updated information in another disclosure, we estimate 
no added burden because these broker-dealers are communicating the 
information in other disclosures they are already delivering.
    \1410\ 2 amendments per year x 102.165 million customer accounts 
x 50% delivering the amended relationship summary to communicate 
updated information x 0.02 hours per delivery = 2,043,300 hours to 
deliver amended relationship summaries. 2,043,300 hours/2,766 
broker-dealers = 739 hours per broker-dealer.
    \1411\ 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 
$62 per hour. 2,043,300 hours x $62 = $126,684,600. $126,684,600/
2,766 broker-dealers = $45,801 per broker-dealer. We estimate that 
broker-dealers will not incur any incremental postage costs to 
deliver these relationship summaries, because we estimate that 
advisers will make the delivery along with other documentation they 
normally would provide, such as account opening documents.
---------------------------------------------------------------------------

    In a change from the proposal, we are also adopting two 
requirements not included in the proposal. First, all firms will be 
required to make available a copy of the relationship summary upon 
request without charge. Second, in a relationship summary that is 
delivered in paper format, firms may link to additional information by 
including URL addresses, QR codes, or other means of facilitating 
access to such information. We believe that these new requirements will 
increase the burden relative to the proposal for some broker-dealers 
that do not currently fulfill these types of disclosure requests, 
including, for example, additional costs associated with tracking 
customer delivery

[[Page 33619]]

preferences related to making copies of the relationship summary 
available upon request, and printing and mailing costs for copies 
delivered in paper. We estimate that the 2,766 broker-dealers with 
relationship summary obligations, on average, will require 0.5 hours 
each annually to comply with this requirement. Therefore, we estimate 
that the 2,766 broker-dealers with relationship summary obligations 
will incur a total of 1,383 aggregate burden hours to make copies of 
the relationship summary available upon request,\1412\ with a monetized 
cost per adviser of $31, or $85,746 in aggregate monetized cost.\1413\ 
We acknowledge that the burden may be more or less than 0.5 hours for 
some broker-dealers, but we believe that, on average, 0.5 hours is an 
appropriate estimate for calculating an aggregate burden for the 
industry for this collection of information.
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    \1412\ 0.5 hours to make paper copies of the relationship 
summary available upon request x 2,677 broker-dealers with 
relationship summary obligations = 1,383 hours.
    \1413\ Based on data from the SIFMA Office Salaries Report, we 
expect that the requirement for broker-dealers to make paper copies 
of the relationship summary available upon request will most likely 
be performed by a general clerk at an estimated cost of $62 per 
hour. 0.5 hours per broker-dealer x $62 = $31 in monetized costs per 
broker-dealer. $31 per broker-dealer x 2,766 broker-dealers with 
relationship summary obligations = $85,746 total aggregate monetized 
cost.
---------------------------------------------------------------------------

    We do not expect broker-dealers to incur external costs in 
delivering amended relationship summaries or communicating the 
information in another way because we estimate that they will make 
these deliveries with, or as part of other disclosures required to be 
delivered. We did not receive comments on this assumption in the 
proposal.
e. Delivery to New Customers or Prospective New Customers
    To estimate the delivery burden for broker-dealers' new or 
prospective new customers, as discussed above, we estimate that the 
2,766 standalone broker-dealers with retail activity have approximately 
102.165 million retail customer accounts.\1414\ We did not receive 
comments on the burdens specific to delivering the relationship summary 
to new and prospective retail investors under rule 17a-14. 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, 11% more new retail investors each year.\1415\ We estimate the 
hour burden for initial delivery of a relationship summary will 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 will be 224,763 hours, or 
81.3 hours per broker-dealer,\1416\ at a monetized cost of $13,935,306 
at an aggregate level, or $5,038 per broker-dealer.\1417\
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    \1414\ See supra footnotes 857-865 and accompanying text.
    \1415\ This represents the average annual rate of growth from 
2014-2018 in the number of accounts for all broker-dealers reporting 
retail activity.
    \1416\ 102.165 million customer accounts x 11% increase = 
11,238,150 new customers. 11,238,150 new customers x 0.02 hours per 
delivery = 224,763 total annual aggregate hours. 224,763/2,766 
broker-dealers = 81.3 hours per broker-dealer for delivery to new 
customers.
    \1417\ 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 $62 per hour. 
224,763 hours x $62 = $13,935,306. $13,935,306/2,766 broker-dealers 
= $5,038 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 estimate that broker-dealers will make the 
delivery along with other documentation, such as periodic account 
statements.
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f. Total New Initial and Annual Burdens
    As discussed above, we estimate the total annual collection of 
information burden for 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) additional delivery to existing customers; (v) delivery 
of amended relationship summaries; (vi) delivery to new and prospective 
customers; and (vii) making copies available upon request. Given these 
requirements, we estimate the total annual aggregate hourly burden to 
be approximately 3,408,533 hours per year, or 1,232 hours on a per 
broker-dealer basis.\1418\ This translates into an aggregate annual 
monetized cost of $219,110,726, or $79,216 per broker-dealer per 
year.\1419\ In addition, we estimate that broker-dealers will incur 
external legal and compliance costs in the initial preparation of the 
relationship summary of approximately $8,560,770 in aggregate, or 
$3,095 per broker-dealer, translating into $2,853,590 annually, or 
$1,032 per broker-dealer, when amortized over a three year 
period.\1420\
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    \1418\ 36,880 hours per year for initial preparation and filing 
of relationship summary + 4,149 hours for posting to website + 8,298 
hours per year for amendments, filing, and posting of amendments + 
681,100 hours for one-time initial delivery to existing customers + 
408,660 hours for delivery to existing customers making material 
changes to their accounts + 2,043,300 hours for delivery of 
amendments + 224,763 hours for delivery to new customers + 1,383 
hours to make paper copies available upon demand = 3,408,533 total 
annual aggregate hours. 3,408,533 hours/2,766 broker-dealers = 1,232 
hours per broker-dealer.
    \1419\ $10,068,240 per year for initial preparation, filing, and 
posting of relationship summary + $257,238 per year for posting to 
website + $514,476 per year for amendments, filing, and posting of 
amendments + $42,228,200 for one-time initial delivery to existing 
customers (amortized over three years) + $25,336,920 for delivery to 
existing customers making material changes to their accounts + 
$126,684,600 for delivery of amendments + $13,935,306 for delivery 
to new customers + $85,746 per year to make paper copies of the 
relationship summary available upon demand = $219,110,726 in total 
annual aggregate monetized cost. $219,110,726/2,766 broker-dealers = 
$79,216 per broker-dealer.
    \1420\ $3,436,755 total external legal costs + $5,124,015 total 
external compliance cost = $8,560,770 total external legal and 
compliance costs. $8,560,770 total external legal and compliance 
costs/2,766 broker-dealers = $3,095 per broker-dealer. $8,560,770 
total external legal and compliance costs/3 = $2,853,590 annually. 
$3,095/3 = $1,032 per year.
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E. Recordkeeping Obligations Under Exchange Act Rule 17a-3 
¹⁴²¹
---------------------------------------------------------------------------

    \1421\ In a concurrent release, we are adopting additional 
burden adjustments to Exchange Act rules 17a-3 and 17a-4. See 
Regulation Best Interest Release, supra footnote 47.
---------------------------------------------------------------------------

    The final requirement to make a record indicating the date that a 
relationship summary was provided to each retail investor, including 
any relationship summary provided before such retail investor opens an 
account, will contain a collection of information that will be found at 
17 CFR 240.17a-3(a)(24) and will be mandatory. The Commission staff 
will use this collection of information in its examination and 
oversight program, and the information generally is kept 
confidential.\1422\ The likely respondents to this collection of 
information requirement are the approximately 2,766 broker-dealers 
currently registered with the Commission that offer services to retail 
investors, as defined above.\1423\
---------------------------------------------------------------------------

    \1422\ See section 24(b) of the Exchange Act.
    \1423\ See supra footnotes 857-865 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.'' \1424\ Exchange Act rules 17a-3 and 17a-4 
specify minimum requirements with respect to the records

[[Page 33620]]

that broker-dealers must make, and how long those records and other 
documents must be maintained, respectively.
---------------------------------------------------------------------------

    \1424\ See section 17(a) of the Exchange Act.
---------------------------------------------------------------------------

    The amendments to Exchange Act rule 17a-3 will require SEC-
registered broker-dealers to make a record indicating the date that a 
relationship summary was provided to each retail investor and to each 
prospective retail investor who subsequently becomes a retail investor. 
We are adopting these amendments as proposed. In the Proposing Release, 
we estimated that the adoption of new paragraph (a)(24) of rule 17a-3 
would result in an incremental burden increase of 0.1 hours annually 
for each of the estimated 2,766 SEC-registered broker-dealers that will 
be required to record the dates that the initial relationship summary 
and each new version thereof, is provided to an existing or prospective 
retail investor.\1425\
---------------------------------------------------------------------------

    \1425\ We applied 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. As discussed above, we are increasing our estimates.
---------------------------------------------------------------------------

    As discussed above in Section II.E, several commenters suggested 
that our estimated burdens for the relationship summary recordkeeping 
obligations were too low.\1426\ Some commenters argued that keeping 
records of when a relationship summary was given to prospective retail 
clients would be unnecessarily burdensome or not feasible, and was not 
adequately considered in the Commission's burden estimates.\1427\ One 
of these commenters said that it would be difficult for firms to 
integrate pre-relationship delivery dates into their operational 
systems and procedures, and that there is no way to track when a 
disclosure is accessed on a website.\1428\
---------------------------------------------------------------------------

    \1426\ See, e.g., CCMC Letter; SIFMA Letter; see also NSCP 
Letter (estimating 80-500 hours to prepare, deliver, and file Form 
CRS, including recordkeeping policies and procedures).
    \1427\ See, e.g., CCMC Letter; SIFMA Letter; Committee of 
Annuity Insurers Letter; Edward Jones Letter. A few others stated 
that creating recordkeeping policies and procedures relating to how 
professionals respond to ``key questions'' would be burdensome and 
extremely difficult. See, e.g., LPL Financial Letter. Although the 
final instructions require ``conversation starter'' questions that 
are similar to the proposed ``key questions,'' we are not increasing 
the burden as urged by commenters. As discussed in Section V.D.2.a. 
above, we increased the burden estimates for the initial preparation 
of the relationship summary, acknowledging, among other things, that 
certain broker-dealers that provide services only online will incur 
additional burdens to develop written answers to the conversation 
starters and make those available on their websites with a hyperlink 
to the appropriate page in the relationship summary for these 
documents. However, we do not expect these broker-dealers to incur 
additional recordkeeping burdens under amendments to Exchange Act 
rule 17a-3 because we are not establishing new or separate 
recordkeeping obligations related to the conversation starters or 
the answers provided by firms in response to the conversation 
starters. See supra footnotes 814-816.
    \1428\ See SIFMA Letter.
---------------------------------------------------------------------------

    After consideration of comments, and because broker-dealers do not 
currently maintain similar records like the relationship summary, we 
are revising our estimate of the time that it would take each broker-
dealer to create the records required by new paragraph (a)(24) of rule 
17a-3 as adopted from 0.1 hours to 0.5 hours. The incremental hour 
burden for broker-dealers to create the records required by new 
paragraph (a)(24) of rule 17a-3 as adopted will therefore be 1,383 
hours,\1429\ for a monetized cost of $87,627 in aggregate, or $32 per 
broker-dealer.\1430\ We also do not expect that broker-dealers will 
incur external costs for the requirement to make records because we 
believe that broker-dealers will make such records in a manner similar 
to their current recordkeeping practices, including those that apply to 
communications and correspondence with retail investors.
---------------------------------------------------------------------------

    \1429\ 2,766 broker-dealers x 0.5 hours annually = 1,383 annual 
hours for recordkeeping.
    \1430\ As with our estimates relating to the proposed amendments 
to Advisers Act rule 204-2 (see, e.g., supra footnote 1284 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 positions are 
$70 and $62, respectively. (17% x 1,383 hours x $70) + (83% x 1,383 
hours x $62) = $87,627. $87,627/2,766 broker-dealers = $32 per 
broker-dealer.
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F. Record Retention Obligations Under Exchange Act Rule 17a-4

    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.'' \1431\ 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 
adopting amendments to rule 17a-4 as proposed that will require broker-
dealers to retain copies of each version of the relationship summary 
provided to current or prospective retail investors, and to preserve 
the record of dates that each version of the relationship summary was 
delivered to any existing retail investor or to any new or prospective 
retail investor customer, pursuant to the new requirements under new 
paragraph (a)(24) under rule 17a-3, as adopted, discussed above. These 
records as well as a copy of each version of a firm's relationship 
summary will 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 will be found at 17 CFR 
240.17a-4 and will be mandatory. The Commission staff will 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 will facilitate the Commission's ability to 
inspect for and enforce compliance with firms' obligations with respect 
to the relationship summary. The information generally is kept 
confidential.\1432\
---------------------------------------------------------------------------

    \1431\ See section 17(a) of the Exchange Act.
    \1432\ See section 24(b) of the Exchange Act.
---------------------------------------------------------------------------

    The likely respondents to this collection of information 
requirement are the approximately 2,766 broker-dealers that report 
retail activity, as described above. We did not receive comments 
related to burdens associated with record retention obligations for 
broker-dealers. We do not expect that broker-dealers will incur 
external costs for the requirement to maintain and preserve a copy of 
each version of the relationship summary as well as the records 
required to be made pursuant to new paragraph (a)(24) of Exchange Act 
rule 17a-3 because broker-dealers are already required to maintain and 
retain similar records related to communication with retail investors.
1. Changes in Burden Estimates and New Burden Estimates
    The approved annual aggregate burden for rule 17a-4 is currently 
1,042,866 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.\1433\ The

[[Page 33621]]

currently approved annual reporting and recordkeeping cost estimate to 
respondents is $20,520,000.\1434\ We estimate that the adopted 
amendments will result in an increase in the collection of information 
burden estimate by 0.10 hour \1435\ for each of the estimated 2,766 
currently registered broker-dealers that report retail sales activity 
and will have relationship summary obligations.\1436\ The incremental 
hour burden for broker-dealers will therefore be 277 hours,\1437\ for a 
monetized cost of $19,390 in aggregate, or $7 per broker-dealer.\1438\ 
This will yield an annual estimated aggregate burden of 702,841 hours 
for all broker-dealers with relationship summary obligations to comply 
with paragraph (e)(10) of Exchange Act rule 17a-4, as amended,\1439\ 
for a monetized cost of approximately $49,198,870.\1440\ In addition, 
the 998 broker-dealers not subject to the amendments \1441\ will 
continue to be subject to an unchanged burden of 254 hours per broker-
dealer, or 253,492 hours for these broker-dealers.\1442\ In addition, 
those maintaining an internal broker-dealer system will continue to be 
subject to an unchanged burden of 450 hours annually, under paragraph 
(e)(10) of Exchange Act rule 17a-4, as amended. In summary, taking into 
account the estimated annual burden of broker-dealers that will 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 956,783 total annual aggregate hours,\1443\ for a 
monetized cost of approximately $66,974,810 million.\1444\
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    \1433\ (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 Supporting Statement for the Paperwork Reduction Act 
Information Collection Submission for Rule 17a-4 (Oct. 19, 2016), 
available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=68823501 (defining an internal broker-
dealer system as ``any facility that provides a mechanism for 
collecting, receiving, disseminating, or displaying system orders 
and facilitating agreement to the basic terms of a purchase or sale 
of a security between a customer and the sponsor, but excludes a 
national securities exchange, an exchange exempt from registration 
based on limited volume, and an alternative trading system.'').
    \1434\ 4,104 broker-dealers x $5,000 annual recordkeeping cost 
per broker-dealer = $20,520,000.
    \1435\ In the Proposing Release, we applied the same 0.2 hour 
estimate as with investment advisers, but divided that burden 
equally between the rule 17a-3 requirement to create a record of the 
dates the relationship summary was delivered to current or 
prospective customers and the rule 17a-4 requirement to maintain 
those records as well as copies of each version of the relationship 
summary. As discussed above, we are increasing the burden estimates 
for the recordkeeping requirement from 0.1 hours to 0.5 hours in 
light of certain comments, however, we believe, on balance, that 0.1 
hour estimate for the record retention requirement is a reasonable 
estimate for purposes of the PRA analysis.
    \1436\ See supra footnotes 857-865.
    \1437\ 2,766 broker-dealers x 0.1 hours annually = 277 annual 
hours for record retention.
    \1438\ 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 
$70 per hour. 277 hours x $70 = $19,390. $19,390/2,766 broker-
dealers = $7 per broker-dealer.
    \1439\ 2,766 broker-dealers required to prepare relationship 
summary x (254 hours + 0.1 hour) = 702,841 hours.
    \1440\ 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 
$70 per hour. 702,841 hours x $70 = $49,198,870.
    \1441\ See supra footnotes 858-863 and accompanying text.
    \1442\ 998 broker-dealers x 254 hours = 253,492 hours for 
broker-dealers not preparing a relationship summary.
    \1443\ 702,841 + 253,492 + 450 = 956,783 total aggregate hours.
    \1444\ 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 
$70 per hour. 956,783 hours x $70 = $66,974,810.
---------------------------------------------------------------------------

2. Revised Annual Burden Estimates
    As noted above, the approved annual aggregate burden for rule 17a-4 
is currently 1,042,866 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 will be 956,783 \1445\ hours, represented by a monetized 
cost of approximately $66,974,810 million,\1446\ based on an estimate 
of 2,766 broker-dealers with the relationship summary obligation and 
998 broker-dealers without, as noted above. This represents a decrease 
of 85,633\1447\ annual aggregate hours in the hour burden and an annual 
decrease of approximately $811,480 from the currently approved total 
aggregate monetized cost for rule 17a-4.\1448\ These changes are 
attributable to the amendments to rule 17a-4 relating to the 
relationship summary as discussed in this release and the decline in 
the number of registered broker-dealer respondents. The revised annual 
reporting and recordkeeping cost to respondents is estimated at 
approximately $18,820,000, or a reduction of $1,700,000 million from 
the currently approved annual reporting and recordkeeping cost burden 
of $20,520,000.\1449\
---------------------------------------------------------------------------

    \1445\ See supra footnote 1443.
    \1446\ See supra footnote 1444.
    \1447\ 1,042,416 hours - 956,783 hours = 85,633 hours.
    \1448\ $67,786,290 - $66,974,810 = $811,480.
    \1449\ 3,764 registered broker-dealers as of December 31, 2018 x 
$5,000 per broker-dealer in record maintenance costs = $18,820,000. 
$20,520,000 - $18,820,000 = $1,700,000.
---------------------------------------------------------------------------

VI. Final Regulatory Flexibility Analysis

    The Commission has prepared the following Final Regulatory 
Flexibility Analysis (``FRFA'') in accordance with section 4(a) of the 
Regulatory Flexibility Act.\1450\ It relates to: (i) New rule 204-5 
under the Advisers Act and amendment to Form ADV (17 CFR 279.1), to add 
a new Part 3: Form CRS (relationship summary); (ii) amendments to rule 
203-1 under the Advisers Act; (iii) amendments to rule 204-1 under the 
Advisers Act; (iv) amendments to rule 204-2 under the Advisers Act; (v) 
new rule 17a-14 under the Exchange Act and new Form CRS (17 CFR 
249.640) (relationship summary); and (vi) amendments to rules 17a-3 and 
17a-4 under the Exchange Act.\1451\ We prepared an Initial Regulatory 
Flexibility Analysis (``IRFA'') in the Proposing Release.\1452\
---------------------------------------------------------------------------

    \1450\ 5 U.S.C. 604(a).
    \1451\ The Commission is also amending 17 CFR 200.800 to display 
the control number assigned to information collection requirements 
for ``Form CRS and rule 17a-14 under the Exchange Act'' by OMB 
pursuant to the PRA. Because the Commission is not publishing the 
amendments to 17 CFR 200.800 in a notice of proposed rulemaking, no 
analysis is required under the Regulatory Flexibility Act. (See 5 
U.S.C. 601(2) (for purposes of the Regulatory Flexibility Act, the 
term ``rule'' means any rule for which the agency publishes a 
general notice of proposed rulemaking).)
    \1452\ See Proposing Release, supra footnote 5.
---------------------------------------------------------------------------

A. Need for and Objectives of the Amendments

    Broker-dealers, investment advisers, and dually registered firms 
all provide important services for retail investors. As discussed above 
in Sections I and IV, research continues to show that retail investors 
are confused about services, fees, conflicts of interest, and the 
required standard of conduct for particular firms as well as the 
differences between broker-dealers and investment advisers. Lack of 
knowledge about important aspects of the market for financial advice, 
such as the services, fees, conflicts of interest, and the required 
standard of conduct for particular firms may harm retail investors by 
deterring them from seeking brokerage or investment advisory services 
even if they could potentially benefit from them, or by increasing the 
risk of a mismatch between the investors' preferences and expectations 
and the actual brokerage or advisory services they receive. Therefore, 
it is important to reduce retail investor confusion in the marketplace 
for brokerage and investment advisory services and to assist retail 
investors with the process of deciding whether to (i) establish an

[[Page 33622]]

investment advisory or brokerage relationship, (ii) engage a particular 
firm or financial professional, or (iii) terminate or switch a 
relationship or specific service. Moreover, it is important to ensure 
that retail investors receive the information they need to clearly 
understand the relationships and services a firm offers, as well as the 
fees, costs, conflicts, standard of conduct, and disciplinary history 
of firms and financial professionals they are considering, and where to 
find additional information, to ameliorate this potential harm.
    As discussed above in Section I above, the Commission considered 
ways to address retail investor confusion and engaged in broad outreach 
to investors and other market participants to solicit feedback on the 
proposal, including comment letters, a ``feedback form,'' investor 
roundtables, and RAND investor testing.
    After carefully considering the comments we received, we are 
adopting disclosure requirements that are designed to ameliorate the 
potential harm of retail investor confusion and to assist retail 
investors with the process of deciding whether to (i) establish an 
investment advisory or brokerage relationship, (ii) engage a particular 
firm or financial professional, or (iii) terminate or switch a 
relationship or specific service.
    As discussed in Section II above, we are adopting new rules and 
rule amendments to require broker-dealers and investment advisers to 
deliver a relationship summary to retail investors. The relationship 
summary will be short with narrative information presented in a 
prescribed order with the following sections: (i) Introduction; (ii) 
relationships and services; (iii) fees, costs, conflicts, and standard 
of conduct; (iv) disciplinary history; and (v) where to find additional 
information. As discussed in Section II.C.3.c above, the relationship 
summary will be in addition to, and not in lieu of, current disclosure 
and reporting requirements for broker-dealers and investment advisers.
    To promote effective communication, firms will be required to write 
their relationship summary in plain English and they are encouraged to 
use charts, graphs, tables, and other graphics or text features to 
respond to the required disclosures. We are limiting the length of the 
relationship summary to keep the disclosures focused.\1453\ The purpose 
of the relationship summary is to summarize information about a 
particular broker-dealer or investment adviser in a format that allows 
for comparability among firms, encourages retail investors to ask 
questions, and highlights additional sources of information.
---------------------------------------------------------------------------

    \1453\ Specifically, the relationship summary for standalone 
broker-dealers and standalone investment advisers must not exceed 
two pages in paper format (or equivalent in electronic format). Dual 
registrants will have the flexibility to decide whether to prepare 
separate or combined relationship summaries. For dual registrants 
that prepare combined relationship summaries, they must not exceed 
four pages in paper format (or equivalent in electronic format).
---------------------------------------------------------------------------

    As discussed in Section II above, we are adopting filing, delivery, 
and updating requirements for the relationship summary. We also are 
adopting amendments to the recordkeeping requirements under the 
Advisers Act rule 204-2 and Exchange Act rules 17a-3 and 17a-4 to 
address the new relationship summary.\1454\
---------------------------------------------------------------------------

    \1454\ 17 CFR 275.204-2; 17 CFR 240.17a-3; 17 CFR 240.17a-4.
---------------------------------------------------------------------------

    All of these requirements are discussed in detail in Section II 
above. The costs and burdens of these requirements on small advisers 
and small broker-dealers are discussed below as well as above in our 
Economic Analysis and Paperwork Reduction Act Analysis, which discuss 
the costs and burdens on all investment advisers and broker-
dealers.\1455\
---------------------------------------------------------------------------

    \1455\ See supra Sections IV and V.
---------------------------------------------------------------------------

B. Significant Issues Raised by Public Comments

    The Commission is sensitive to the burdens that the new rules and 
rule amendments may have on small entities. In the Proposing Release, 
we requested comment on matters discussed in the IRFA. In particular, 
we sought comments on the number of small entities subject to the new 
relationship summary, and the new rules and rule amendments as well as 
the potential impacts on small entities. We sought comments on whether 
the proposal could have an effect on small entities that had not been 
considered. We also requested that commenters describe the nature of 
any impact on small entities and provide empirical data to support the 
extent of such impact.
    The Commission did not receive comments specifically addressing the 
IRFA. However, as discussed in the Economic Analysis and Paperwork 
Reduction Act Analysis above, we received comments regarding the 
potential costs and burdens of the proposal on investment advisers and 
broker-dealers, including those that are small entities.\1456\
---------------------------------------------------------------------------

    \1456\ See supra Sections IV.D.2 and V.
---------------------------------------------------------------------------

    With regard to comment letters addressing small firms in 
particular, the Commission received comment letters concerning the 
impact of ongoing delivery requirements on small firms.\1457\ As 
discussed in Sections II.C.3.c and II.C.4, firms must comply with 
ongoing delivery requirements to (i) particular retail investors under 
certain circumstances \1458\ and (ii) all retail investors who are 
existing clients or customers when a relationship summary is updated. 
The commenters appeared to be discussing both types of ongoing delivery 
requirements. Specifically, a commenter stated that to comply with 
ongoing delivery requirements, firms would need to implement a process 
that would include additional costs for delivery, especially for small 
firms who are more likely to conduct such delivery in hard copy.\1459\ 
Another commenter stated that the existing Form ADV brochure delivery 
requirements and the ongoing delivery requirements of the relationship 
summary would impose unjustifiable administrative burdens on advisers, 
the majority of whom the commenter considers to be small 
businesses.\1460\ The commenter defined the term ``small business'' as 
an investment adviser who has ten or fewer non-clerical 
employees.\1461\ As discussed in Section VI.C.1 below, the definition 
of small entities for purposes of the Advisers Act and the Regulatory 
Flexibility Act concerns assets under management and total assets, not 
the number of employees.\1462\ Therefore, we are unable to assess 
whether the businesses the commenter is discussing fall under the 
definition of small entity for purposes of the Advisers Act and the 
Regulatory Flexibility Act.\1463\ As discussed in Section VI.C.1 below, 
the new requirements will not affect most investment advisers that are 
small entities because they are generally registered with one or more 
state securities authorities and not with the Commission.
---------------------------------------------------------------------------

    \1457\ See NSCP Letter; Pickard Djinis and Pisarri Letter.
    \1458\ As discussed in Section II.C.3.c, firms must deliver the 
most recent relationship summary to a retail investor who is an 
existing client or customer upon certain triggers. Also, firms must 
deliver the relationship summary to a retail investor within 30 days 
upon the retail investor's request.
    \1459\ See NSCP Letter.
    \1460\ See Pickard Djinis and Pisarri Letter.
    \1461\ Id.
    \1462\ See 17 CFR 275.0-7.
    \1463\ Id.
---------------------------------------------------------------------------

    We agree that the ongoing delivery requirements will impose added 
costs, as discussed above in the Economic Analysis and Paperwork 
Reduction Act

[[Page 33623]]

Analysis,\1464\ but the costs may not necessarily be higher for small 
firms. To the extent that small firms are more likely to have fewer 
retail investors than larger firms, the ongoing delivery requirements 
should impose lower variable costs on small firms than on larger firms. 
Therefore, the ongoing delivery requirements should impose lower 
variable costs on small firms, who have fewer retail investors, than on 
larger firms who have more retail investors. Also, firms have the 
flexibility to communicate any changes in the relationship summary by 
either delivering the relationship summary or by communicating the 
information through another disclosure that is delivered to the retail 
investor, which should mitigate the costs to all firms, including small 
firms.\1465\ The additional hours per investment adviser and broker-
dealer, the monetized cost per investment adviser and broker-dealer, 
and the incremental external legal and compliance cost for investment 
advisers and broker-dealers, attributable to ongoing delivery 
requirements are estimated above in the Paperwork Reduction 
Analysis.\1466\ To the extent that the ongoing delivery requirements 
impose added costs to small investment advisers, we disagree that 
existing Form ADV brochure delivery requirements and the ongoing 
delivery requirements of the relationship summary would impose 
administrative burdens on small investment advisers that are 
unjustifiable. As discussed in Section II.C.3.c above, the relationship 
summary and the existing Form ADV brochure serve different purposes. 
The relationship summary is designed to provide a high-level overview 
to retail investors while the Form ADV brochure is designed to present 
more detailed disclosures.
---------------------------------------------------------------------------

    \1464\ See supra Sections IV and V.
    \1465\ See supra Sections II.C.4 and IV.D.2.
    \1466\ See supra Sections V.C.2 and V.D.2.
---------------------------------------------------------------------------

    The Commission is not adopting different ongoing delivery 
requirements for small entities. For the reasons discussed in Section 
VI.E below, establishing different compliance or reporting requirements 
for small investment advisers and small broker-dealers will be 
inappropriate under these circumstances. Moreover, retail investors 
considering and receiving services should receive current information 
from all firms, not just larger firms, to help them make a decision 
about continuing to receive services and to let them know when there 
have been changes to this information. They should also understand 
their available options during certain decision points when firms are 
required to deliver another relationship summary.\1467\ Additionally, 
it is important and beneficial for retail investors to receive a 
relationship summary within 30 days upon request to ensure that retail 
investors receive the relationship summary as needed. As a result, we 
believe that the benefits to retail investors justify the potential 
cost of ongoing delivery.
---------------------------------------------------------------------------

    \1467\ As discussed in Section II.C.3.c, firms must deliver the 
most recent relationship summary to a retail investor who is an 
existing client or customer before or at the time the firm: (i) 
Opens a new account that is different from the retail investor's 
existing account(s); (ii) recommends that the retail investor roll 
over assets from a retirement account into a new or existing account 
or investment; or (iii) recommends or provides a new brokerage or 
investment advisory service or investment that does not necessarily 
involve the opening of a new account and would not be held in an 
existing account.
---------------------------------------------------------------------------

C. Small Entities Subject to the Rule and Rule Amendments

    The amendments will 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 Regulatory Flexibility Act, an investment adviser generally is a 
small entity if it: (i) Has assets under management having a total 
value of less than $25 million; (ii) did not have total assets of $5 
million or more on the last day of the most recent fiscal year; and 
(iii) 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.\1468\ As discussed in Section V.A.1 above, 
the Commission estimates that based on IARD data as of December 31, 
2018, approximately 8,235 investment advisers will be subject to new 
rule 204-5 under the Advisers Act, Form CRS (required by new Part 3 of 
Form ADV) (the relationship summary), the amendments to rules 203-1, 
204-1, and rule 204-2 under the Advisers Act.\1469\ Our new rules and 
amendments will 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.\1470\ Based on IARD data, we estimate that as of 
December 31, 2018, approximately 561 SEC-registered advisers are small 
entities under the Regulatory Flexibility Act.\1471\ Of these, 183 have 
individual high net worth and individual non-high net worth clients, 
and will therefore be subject to the new requirements under the 
Advisers Act.\1472\
---------------------------------------------------------------------------

    \1468\ See 17 CFR 275.0-7.
    \1469\ See supra footnote 1204 and accompanying text.
    \1470\ 15 U.S.C. 80b-3a.
    \1471\ Based on SEC-registered investment adviser responses to 
Items 5.F. and 12 of Form ADV.
    \1472\ Based on SEC-registered investment adviser responses to 
Items 5.D.(a)(1), 5.D.(a)(3), 5.D.(b)(1), 5.D.(b)(2), 5.F. and 12 of 
Form ADV. These responses indicate that the investment adviser has 
clients that are high net worth individuals and/or individuals 
(other than high net worth individuals), or that the investment 
adviser has regulatory assets under management attributable to 
clients that are high net worth individuals and/or individuals 
(other than high net worth individuals), and that the investment 
adviser is a small entity. Of these small advisers, two are dually 
registered as a broker-dealer and an investment adviser and may 
offer services to retail investors as both a broker-dealer and an 
investment adviser (e.g., ``dual registrants'' for purposes of the 
relationship summary). See supra footnote 63. As discussed in 
Section II.C.2, dual registrants must file the relationship summary 
using both IARD and Web CRD[supreg]. In this FRFA, dual registrants 
are counted in both the total number of small advisers and small 
broker-dealers that would be subject to the new requirements. 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.
---------------------------------------------------------------------------

2. Broker-Dealers
    For purposes of Commission rulemaking in connection with the 
Regulatory Flexibility Act, a broker-dealer will be deemed a small 
entity if it: (i) Had total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the date in the prior fiscal year 
as of which its audited financial statements were prepared pursuant to 
rule 17a-5(d) under the Exchange Act,\1473\ or, if not required to file 
such statements, had total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the last business day of the 
preceding fiscal year (or in the time that it has been in business, if 
shorter); and (ii) is not affiliated with any person (other than a 
natural person) that is not a small business or small 
organization.\1474\
---------------------------------------------------------------------------

    \1473\ 17 CFR 240.17a-5(d).
    \1474\ See 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    As discussed in Section V.D.1 above, the Commission estimates that 
as of December 31, 2018, approximately 2,766 broker-dealers will be 
subject to the new Form CRS (relationship summary) requirements and new 
Exchange Act rule 17a-14, as well as

[[Page 33624]]

amendments to Exchange Act rules 17a-3 and 17a-4.\1475\ Further, based 
on FOCUS Report data, the Commission estimates that as of December 31, 
2018, approximately 985 broker-dealers may be deemed small entities 
under the Regulatory Flexibility Act. Of these, approximately 756 have 
retail business, and will be subject to the new requirements.\1476\
---------------------------------------------------------------------------

    \1475\ See supra footnote 1352 and accompanying text.
    \1476\ See supra footnote 1352 (discussing how we identify 
retail sales activity from Form BR).
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The new requirements impose certain reporting and compliance 
requirements on certain investment advisers and broker-dealers, 
including those that are small entities, requiring them to create and 
update relationship summaries, and comply with certain filing, 
delivery, and recordkeeping requirements. The new requirements are 
summarized in this FRFA (Section VI.A above). All of these requirements 
are also discussed in detail, in Section II above, and these 
requirements as well as the costs and burdens on investment 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.
1. Initial Preparation and Filing of the Relationship Summary
    Requiring each firm that offers services to retail investors to 
prepare and file a relationship summary will impose additional costs on 
may firms, including some small advisers and small broker-dealers. 
Investment advisers must file their relationship summary as Form ADV 
Part 3 (Form CRS) electronically through IARD. Broker-dealers must file 
their relationship summary as Form CRS electronically through Web 
CRD[supreg]. All relationship summaries must be filed using text-
searchable format with machine-readable headings.
    Investment Advisers. Our Paperwork Reduction Analysis and Economic 
Analysis discuss the costs and burdens of preparing and filing the 
relationship summary for investment advisers, including small 
advisers.\1477\ In addition, as discussed in our Paperwork Reduction 
Analysis, above, we anticipate that some advisers may incur a one-time 
initial cost for external legal and compliance consulting fees in 
connection with the initial preparation of the relationship 
summary.\1478\ Generally, all advisers, including small advisers that 
advise retail investors are currently required to prepare and 
distribute Part 2A of Form ADV (the firm brochure). Because advisers 
already provide disclosures about their services, fees, costs, 
conflicts, and disciplinary history in their firm brochures,\1479\ they 
will be able to use some of this information to respond to the 
disclosure requirements of the relationship summary. They will, 
however, have to draft a completely new disclosure to comply with the 
new format of the relationship summary. As discussed above, 
approximately 183 small advisers currently registered with us will be 
subject to the new requirements.\1480\ As discussed above in our 
Paperwork Reduction Act Analysis, the new initial preparation and 
filing requirements will impose an annual burden of approximately 6.67 
annual hours per adviser, or 1,221 annual hours in aggregate for small 
advisers.\1481\ We therefore expect the annual monetized costs to small 
advisers associated with these amendments to be $1,965 per adviser, or 
$359,595 in aggregate for small advisers.\1482\ We expect the 
incremental external legal and compliance cost for small advisers to be 
estimated at $825 per adviser, or $150,975 in aggregate for small 
advisers.\1483\
---------------------------------------------------------------------------

    \1477\ See supra Sections V.A and IV.D.2.
    \1478\ See supra Section V.A.
    \1479\ See supra footnote 904.
    \1480\ See supra Section VI.C.1.
    \1481\ See supra Section V.A.2. As discussed in the Paperwork 
Reduction Act Analysis, we expect each investment adviser to spend 
approximately 20 hours preparing and filing the relationship 
summary, which as amortized over three years is approximately 6.67 
hours. 6.67 hours per adviser for preparing and filing the 
relationship summary x 183 small advisers = approximately 1,221 
hours in aggregate for small advisers.
    \1482\ See supra Sections V.A.2. Monetized cost of $1,965 per 
adviser for the initial preparation and filing of the relationship 
summary x 183 small advisers = $359,595 monetized cost in aggregate 
for small advisers. As discussed in the Paperwork Reduction Act 
Analysis, we believe that performance of this function will most 
likely be equally allocated between a senior compliance examiner and 
a compliance manager.
    \1483\ See supra Section V.A.2.b. $825 in external legal and 
compliance costs per adviser x 183 small advisers = $150,975 in 
aggregate for small advisers.
---------------------------------------------------------------------------

    Broker-Dealers. Our Paperwork Reduction Analysis and Economic 
Analysis discuss the costs and burdens of preparing and filing the 
relationship summary for broker-dealers, including small broker-
dealers.\1484\ In addition, as discussed in our Paperwork Reduction 
Analysis, above, we anticipate that some broker-dealers may incur a 
one-time initial cost for external legal and compliance consulting fees 
in connection with the initial preparation of the relationship 
summary.\1485\ As discussed in Sections IV.D.2 and V.D.2, broker-
dealers are not currently required to deliver to their retail investors 
a comprehensive written document comparable to investment advisers' 
Form ADV Part 2A. Therefore, broker-dealers may incur comparatively 
greater compliance costs than investment advisers. As discussed above, 
approximately 756 small broker-dealers will be subject to the new 
requirements.\1486\ As discussed above in our Paperwork Reduction Act 
Analysis, the new initial preparation and filing requirements will 
impose an annual burden of approximately 13.33 annual hours per broker-
dealer, or 10,077 annual hours in aggregate for small broker-
dealers.\1487\ We therefore expect the annual monetized costs to small 
broker-dealers associated with these amendments to be $3,640 per 
broker-dealer, or $2,751,840 in aggregate for small broker-
dealers.\1488\ We expect the incremental external legal and compliance 
cost for small broker-dealers to be estimated at $1,032 per broker-
dealer, or $780,192 in aggregate for small broker-dealers.\1489\
---------------------------------------------------------------------------

    \1484\ See supra Sections V.D and IV.D.2.
    \1485\ See supra Section V.D.
    \1486\ See supra Section VI.C.2.
    \1487\ See supra Section V.D.2. As discussed in the Paperwork 
Reduction Act Analysis, we expect each broker-dealer to spend 
approximately 40 hours preparing and filing the relationship 
summary, which as amortized over three years is approximately 13.33 
hours. 13.33 hours per broker-dealer for preparing and filing the 
relationship summary x 756 small broker-dealers = approximately 
10,077 hours in aggregate for small broker-dealers.
    \1488\ See supra Section V.D.2. Monetized cost of $3,640 per 
broker-dealer for the initial preparation and filing of the 
relationship summary x 756 small broker-dealers = $2,751,840 
monetized cost in aggregate for small broker-dealers. As discussed 
in the Paperwork Reduction Act Analysis, we believe that the 
performance of this function will most likely be equally allocated 
between a senior compliance examiner and a compliance manager.
    \1489\ See supra Section V.D.2.b. 756 small broker-dealers x 
$1,032 in external legal and compliance costs on average per broker-
dealer = $780,192.
---------------------------------------------------------------------------

    Costs Generally. 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 two pages for a 
standalone investment adviser and standalone broker-dealer and four 
pages for a dual registrant in length or equivalent limit if in 
electronic format. Second, although the relationship summary will 
require more narrative responses, the disclosure will still involve 
some degree of standardization across firms, requiring firms to use 
standardized headings in a prescribed order. Third, firms will be 
prohibited

[[Page 33625]]

from including disclosures in the relationship summary other than the 
disclosure that is required or permitted by the Instructions and 
applicable items.
    The compliance costs could, however, be different across firms with 
relatively smaller or larger numbers of retail investors as customers 
or clients. For example, as discussed in Section IV.D.2 above, to the 
extent that developing the relationship summary entails a fixed cost, 
firms with fewer retail investors as customers or clients may be at 
disadvantage relative to firms with more retail investors as customers 
or clients because the former would amortize these costs over a smaller 
retail investor base. Therefore, to the extent that small firms are 
more likely to have fewer retail investors than larger firms, small 
firms may be at a disadvantage relative to larger firms. On the other 
hand, smaller firms are likely to have fewer types of fees, costs, and 
conflicts to report compared to larger firms, potentially making it 
less burdensome for them to summarize the required information.
    As discussed in Section IV.D.2 above, small advisers and small 
broker-dealers may disproportionately incur costs associated with 
electronic and graphical formatting, particularly if they do not have 
an existing web presence. However, because the final instructions 
encourage, but do not require electronic and graphical formatting, 
firms would only bear these costs if they expected these features to 
provide benefits that justify these costs. Similarly, small advisers 
and small broker dealers may disproportionally incur costs associated 
with the requirement to file their relationship summaries with machine-
readable headings and text-searchable format. However, costs for firms, 
including small entities, could be minimal to the extent they implement 
structured headings in PDF formatted documents by creating a bookmark 
for each of the headings.\1490\
---------------------------------------------------------------------------

    \1490\ See supra Section II.C.2.
---------------------------------------------------------------------------

2. Delivery and Updating Requirements Related to the Relationship 
Summary
    As discussed in Section II.C above, firms must follow certain 
delivery and updating requirements. Investment advisers must deliver a 
relationship summary to each retail investor before or at the time the 
firm enters into an investment advisory contract with the retail 
investor, even if the agreement is oral. Broker-dealers must deliver a 
relationship summary to each retail investor, before or at the earliest 
of: (i) A recommendation of an account type, a securities transaction, 
or an investment strategy involving securities; (ii) placing an order 
for the retail investor; or (iii) the opening of a brokerage account 
for the retail investor. Dual registrants must deliver the relationship 
summary at the earlier of the delivery requirements for the investment 
adviser or broker-dealer.
    As discussed in Section II.C above, firms must update, file 
amendments to, and re-deliver the relationship summary under certain 
circumstances. Specifically, firms must update the relationship summary 
and file it within 30 days whenever any information in the relationship 
summary becomes materially inaccurate. The filing must include an 
exhibit highlighting changes. Firms must communicate any changes in the 
updated relationship summary to retail investors who are existing 
clients or customers within 60 days after the updates are required to 
be made and without charge.\1491\ Additionally, firms must deliver the 
relationship summary to a retail investor within 30 days upon the 
retail investor's request and re-deliver the relationship summary to 
existing clients and customers under certain circumstances.\1492\
---------------------------------------------------------------------------

    \1491\ Firms can make the communication by delivering the 
amended relationship summary or by communicating the information 
through another disclosure that is delivered to the retail investor.
    \1492\ Specifically, firms must deliver the most recent 
relationship summary to a retail investor who is an existing client 
or customer before or at the time the firm: (i) Opens a new account 
that is different from the retail investor's existing account(s); 
(ii) recommends that the retail investor roll over assets from a 
retirement account into a new or existing account or investment; or 
(iii) recommends or provides a new brokerage or investment advisory 
service or investment that does not necessarily involve the opening 
of a new account and would not be held in an existing account.
---------------------------------------------------------------------------

    As discussed in Sections II.C above, we are adopting requirements 
concerning electronic posting and manner of delivery. Firms must post 
the current version of the relationship summary prominently on their 
public website, if they have one. Firms must include a telephone number 
where retail investors can request up-to-date information and request a 
copy of the relationship summary. Firms must make a copy of the 
relationship summary available upon request without charge. If the 
relationship summary is delivered electronically, it must be presented 
prominently in the electronic medium. If the relationship summary is 
delivered in paper format as part of a package of documents, firms must 
ensure that the relationship summary is the first among any documents 
that are delivered at that time. 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 these 
requirements are estimated above in the Paperwork Reduction 
Analysis.\1493\
---------------------------------------------------------------------------

    \1493\ See supra Section V.
---------------------------------------------------------------------------

3. Recordkeeping Requirements Related to the Relationship Summary
    As discussed in Section II.E above, we are adopting amendments to 
the recordkeeping requirements under Advisers Act rule 204-2 and 
Exchange Act rules 17a-3 and 17a-4 to address the new relationship 
summary.\1494\ The amendments to Advisers Act rule 204-2 will require 
investment advisers who are registered or required to be registered to 
make and keep true, accurate and current, a copy of each relationship 
summary and each amendment or revision to the relationship summary, as 
well as a record of the dates that each relationship summary, and each 
amendment or revision thereto, was given to any client or to any 
prospective client who subsequently becomes a client. Investment 
advisers must maintain and preserve their respective records in an 
easily accessible place for a period of 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.\1495\ The amendments to Exchange Act rule 17a-3 will require 
broker-dealers to make and keep current a record of the date that each 
relationship summary was provided to each retail investor, including 
any relationship summary that was provided before such retail investor 
opens an account. The amendments to Exchange Act rule 17a-4 will 
require broker-dealers to maintain and preserve in an easily accessible 
place all record dates described above as well as a copy of each 
relationship summary until at least six years after such record or 
relationship summary is created.
---------------------------------------------------------------------------

    \1494\ 17 CFR 275.204-2; 17 CFR 240.17a-3; 17 CFR 240.17a-4.
    \1495\ See 17 CFR 275.204-2(e)(1).
---------------------------------------------------------------------------

    These amendments are designed to update recordkeeping rules in 
light of the new relationship summary, and, for investment advisers, 
they mirror the current recordkeeping requirements for the Form ADV 
brochure and brochure supplement.\1496\ As discussed in Section II.E 
above, the recordkeeping requirements will facilitate the Commission's 
ability to inspect for and enforce compliance with the

[[Page 33626]]

relationship summary requirements and also may facilitate firms' 
ability to monitor for compliance with delivery requirements.
---------------------------------------------------------------------------

    \1496\ See 17 CFR 275.204-2(a)(14)(i) and 17 CFR 275.204-
2(e)(1).
---------------------------------------------------------------------------

    As discussed in the Paperwork Reduction Act Analysis in Section V.B 
above, the amendments to Advisers Act rule 204-2 will impose an annual 
burden of approximately 0.2 annual hours per adviser, or 37 annual 
hours in aggregate for small advisers.\1497\ We therefore expect the 
annual monetized costs to small advisers associated with these 
amendments to be $12 per adviser,\1498\ or $2,196 in aggregate for 
small advisers.\1499\ We do not expect investment advisers to incur any 
external costs with respect to the amendments to Advisers Act rule 204-
2.\1500\
---------------------------------------------------------------------------

    \1497\ 0.2 hours x 183 small advisers = 37 hours, when rounded 
up to the nearest hour.
    \1498\ As discussed in, the Paperwork Reduction Analysis, we 
believe the 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. See supra Section V.B.
    \1499\ $12 per adviser x 183 small advisers = approximately 
$2,196 in aggregate for small advisers.
    \1500\ See supra Section V.B.
---------------------------------------------------------------------------

    As discussed in the Paperwork Reduction Act Analysis in Sections 
V.E and V.F, the amendments to Exchange Act rules 17a-3 and 17a-4 will 
impose an annual burden of approximately 0.6 annual hours per broker-
dealer, or 454 annual hours in the aggregate for small broker-
dealers.\1501\ We therefore expect the annual monetized cost to small 
broker-dealers associated with these amendments to be $39 per broker-
dealer,\1502\ or $29,484 in aggregate for small broker-dealers.\1503\ 
We do not expect broker-dealers to incur any external costs with 
respect to the amendments to Exchange Act rules 17a-3 and 17a-4.\1504\
---------------------------------------------------------------------------

    \1501\ As discussed in Section V.E, amendments to Exchange Act 
rule 17a-3 will impose a burden of approximately 0.5 annual hours 
per broker-dealer. As discussed in Section V.F, amendments to 
Exchange Act rule 17a-4 will impose a burden of approximately 0.1 
annual hours per broker-dealer. Therefore, together, amendments to 
Exchange Act rules 17a-3 and 17a-4 will impose a burden of 
approximately 0.6 hours annually. 0.6 hours x 756 small broker-
dealers = approximately 454 annual hours in aggregate for small 
broker-dealers.
    \1502\ $32 per broker dealer for amendments to Exchange Act rule 
17a-3 + $7 per broker-dealer for amendments to Exchange Act rule 
17a-4 = $39 per broker-dealer. As discussed in the Paperwork 
Reduction Act Analysis, we believe that the performance of the 
functions associated with the amendments to Exchange Act rule 17a-3 
will most likely be allocated between compliance clerks and general 
clerks. Also as discussed in the Paperwork Reduction Act Analysis, 
we believe that the performance of the functions associated with the 
amendments to Exchange Act rule 17a-4 will be performed by 
compliance clerks. See supra Sections V.E and V.F.
    \1503\ $32 per broker dealer for amendments to Exchange Act rule 
17a-3 + $7 per broker-dealer for amendments to Exchange Act rule 
17a-4 = $39 per broker-dealer. $39 x 756 small broker-dealers = 
$29,484. See supra Sections V.E and V.F.
    \1504\ See supra Sections V.E and V.F.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entities. We 
considered the following alternatives for small entities in relation to 
the new requirements: (i) The establishment of differing compliance or 
reporting requirements or timetables that take into account the 
resources available to small entities; (ii) the clarification, 
consolidation, or simplification of compliance and reporting 
requirements for small entities; (iii) the use of performance rather 
than design standards; and (iv) an exemption from coverage of the new 
requirements, or any part thereof, for such small entities.\1505\
---------------------------------------------------------------------------

    \1505\ As discussed in the Economic Analysis in Section IV.D.4, 
the Commission considered the following alternatives as they affect 
all firms, including small entities: (i) Requiring a new, separate 
disclosure versus amending existing disclosure requirements; (ii) 
alternatives concerning the form and format of the relationship 
summary; (iii) alternatives concerning the disclosures concerning 
the summary of fees, costs, conflicts, and standard of conduct; (iv) 
alternatives concerning filing and delivery; and (v) alternatives to 
compliance deadlines, including transition provisions.
---------------------------------------------------------------------------

    Regarding the first alternative, the Commission believes that 
establishing different compliance or reporting requirements for small 
advisers and small broker-dealers will be inappropriate under these 
circumstances. We considered adopting tiered compliance dates so that 
smaller investment advisers and smaller broker-dealers would have had 
more time to comply. This would have been an alternative to the 
proposal, which did not include such tiered compliance. However, as 
adopted, instead of providing more time to smaller investment advisers 
and smaller broker-dealers only, we are extending the compliance dates 
for all firms. As discussed in Section II.D above, we believe the final 
compliance dates provide adequate notice and opportunity for all firms 
to comply with the new requirements.
    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 will be inconsistent with the purposes 
of the Advisers Act and the Exchange Act to specify differences for 
small entities under the new requirements. As discussed above, we 
believe that the new requirements will result in multiple benefits to 
all retail investors, including alerting retail investors to certain 
information to consider when deciding whether to (i) establish an 
investment advisory or brokerage relationship, (ii) engage a particular 
firm or financial professional, or (iii) terminate or switch a 
relationship or specific service.\1506\ In addition, the content of the 
relationship summary will facilitate comparisons across firms.\1507\ We 
believe that these benefits should apply to retail investors that 
engage smaller firms as well as retail investors that engage larger 
firms. To establish different disclosure requirements for small 
entities will diminish this investor protection for clients and 
customers of small entities.
---------------------------------------------------------------------------

    \1506\ See supra Sections IV and VI.A.
    \1507\ See supra Sections I and IV.
---------------------------------------------------------------------------

    As discussed above in Section II.C above, we are requiring that 
investment advisers and broker-dealers file their relationship 
summaries with the Commission.\1508\ As discussed in Section II.C.2, 
there are several reasons we are requiring the relationship summaries 
to be filed with the Commission. First, the public will benefit by 
being able to use a central location to find any firm's relationship 
summary,\1509\ which may facilitate simpler comparisons across firms. 
Second, some firms may not maintain a website, and therefore their 
relationship summaries will not otherwise be accessible to the public. 
Third, by having firms file the relationship summaries with the 
Commission, Commission staff can more easily monitor the filings for 
compliance. These benefits of filing are important for retail investors 
who are 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 so using the 
internet to file electronically should not increase costs for those 
advisers.\1510\ All relationship

[[Page 33627]]

summaries must be filed using a text-searchable format with machine-
readable headings. There are several reasons we are requiring firms to 
file their relationship summaries with machine-readable headings and 
text-searchable format, including that this formatting will facilitate 
the aggregation and comparison of responses to specific items across 
different relationship summaries and is consistent with the 
Commission's ongoing efforts to modernize our forms by taking advantage 
of technological advances, both in the manner in which information is 
reported to the Commission and how it is provided to investors and 
other users, as discussed above.\1511\ These benefits are important for 
filings by all firms and would be significantly reduced by allowing 
different requirements for small entities. Costs for firms, including 
small entities, could be minimal to the extent they implement 
structured headings in PDF formatted documents by creating a bookmark 
for each of the headings.\1512\
---------------------------------------------------------------------------

    \1508\ Investment advisers must file their relationship 
summaries with the Commission electronically through IARD in the 
same manner as they currently file Form ADV Parts 1 and 2. Broker-
dealers must file their relationship summaries with the Commission 
electronically through Web CRD[supreg]. Dual registrants must file 
the relationship summary using both IARD and Web CRD[supreg].
    \1509\ The filed relationship summaries will be accessible 
through the Commission's investor education website Investor.gov. 
See supra footnote 661 and accompanying text.
    \1510\ 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 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 includes the relationship summary, if it can 
demonstrate that filing electronically would impose an undue 
hardship. See General Instruction 17 to Form ADV.
    \1511\ See supra Section II.C.2.
    \1512\ See supra Section II.C.2.
---------------------------------------------------------------------------

    The requirement for investment advisers and broker-dealers to post 
their relationship summary on their public websites, if they have a 
public website, in a location and format that is easily accessible for 
retail investors, 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 will not be required to post the relationship 
summary on their websites.\1513\ In other ways, as well, the 
requirements incorporate flexibility for small broker-dealers and small 
advisers to comply with the requirements. For instance, we are 
requiring firms to communicate the information in an updated 
relationship summary to retail investors who are existing clients or 
customers within 60 days after the updates are required to be made and 
without charge.\1514\ Firms can communicate this information by 
delivering the amended relationship summary or by communicating the 
information through another disclosure that is delivered to the retail 
investor. This requirement provides firms the ability to disclose 
changes without requiring them to duplicate disclosures and incur 
additional costs.
---------------------------------------------------------------------------

    \1513\ Firms must provide a telephone number in their 
relationship summary that retail investors can call to obtain up-to-
date information and request a copy of the relationship summary. See 
supra Section II.B.5.
    \1514\ See supra Section II.C.4.
---------------------------------------------------------------------------

    We believe it will be inappropriate to establish different 
recordkeeping requirements for small entities, because the 
recordkeeping requirements will facilitate the Commission's ability to 
inspect for and enforce compliance with firms' obligations with respect 
to the relationship summary, which is important for retail investor 
clients and customers of both large and small firms. Also, the 
Commission is not adopting different ongoing delivery requirements for 
small entities for the reasons discussed in Section VI.B above.
    Regarding the second alternative, we clarified and simplified 
certain requirements for all entities, as an alternative to the 
proposal.\1515\ However, we believe the final requirements are clear 
and that further clarification, consolidation, or simplification of the 
compliance and reporting requirements separately for small entities is 
not necessary. For the same reasons discussed above in this section 
concerning the first alternative, we believe that further clarifying, 
consolidating, or simplifying the requirements only for small entities 
will be inappropriate under these circumstances.
---------------------------------------------------------------------------

    \1515\ See supra Sections I and II. For example, we have 
clarified re-delivery requirements by replacing the proposed 
standard of ``materially change the nature and scope of the 
relationship'' with two more specific and easily identifiable 
triggers that we believe would not implicate the same operational or 
supervisory burdens described by commenters to meet the proposed 
requirement. As another example, in a change from the proposal, we 
eliminated the proposed requirement that standalone broker-dealers 
and standalone investment advisers include a separate section using 
prescribed wording that generally describes how the services of 
investment advisers and broker-dealers, respectively, differ from 
the firm's services. Instead, we adopted a simpler approach so firms 
will be required to simply state that free and simple tools are 
available to research firms and financial professionals at 
Investor.gov/CRS, which also provides educational materials about 
broker-dealers, investment advisers, and investing.
---------------------------------------------------------------------------

    Regarding the third alternative, we considered using performance 
rather than design standards. Performance standards would allow for 
increased flexibility in the methods firms can use to achieve the 
objectives of the requirements. Design standards would specify the 
behavior or manner of compliance that regulated entities must adopt. We 
revised the combination of performance and design standards of the 
requirements, as an alternative to the proposal.\1516\ The Commission 
believes that the final relationship summary and the related new rules 
and amendments appropriately use a combination of performance and 
design standards for all firms, including those that are small 
entities.
---------------------------------------------------------------------------

    \1516\ See supra Sections I and II. For example, in the final 
requirements we require less prescribed wording, and provide more 
flexibility in certain formatting and filing requirements. See supra 
Sections II.A.1 (discussing limited prescribed wording) and II.A.5 
(discussing more flexible formatting and filing requirements for 
dual registrants).
---------------------------------------------------------------------------

    The Commission is adopting certain performance standards as an 
alternative to design standards so firms will have some flexibility in 
how they complete the relationship summary. Instead of requiring 
extensive prescribed language, as proposed, prescribed wording will be 
limited and, instead, firms will complete most of the relationship 
summary using their own words.\1517\ Although this increases costs to 
firms, including small firms, as discussed above,\1518\ firms will now 
have the flexibility to create disclosures that are more accurately 
tailored to their business, and therefore more understandable and 
relevant to retail investors.\1519\ In addition, we are encouraging, 
but not requiring, firms to use charts, graphs, tables, and other 
graphics or text features to respond to the required disclosures.\1520\ 
In an alternative to the proposal, which required dual registrants to 
file a single relationship summary, dual registrants will have the 
flexibility to decide whether to prepare separate or combined 
relationship summaries.\1521\ In another alternative to the proposal, 
which required firms to provide a toll-free telephone number under 
certain circumstances, we are not requiring the telephone number to be 
toll-free.\1522\ As discussed in Section II.B.5 above, firms must 
include a telephone number where retail investors can request up-to-
date information and request a copy of the relationship summary. 
Although we are adopting a requirement to provide a telephone number, 
we are not requiring the telephone number to be toll-free. If firms, 
including small firms, do not already have a toll-free telephone 
number, they will not be required to obtain one to comply with the 
requirements of the relationship summary. Firms will have the 
flexibility to decide whether the telephone number

[[Page 33628]]

they provide in their relationship summary will be toll-free.
---------------------------------------------------------------------------

    \1517\ See supra Section II.A.1.
    \1518\ See supra Sections V.A and V.D.
    \1519\ See supra Section II.A.1.
    \1520\ See supra Section II.A.3.
    \1521\ See supra Section II.A.5.
    \1522\ See supra Section II.B.5.
---------------------------------------------------------------------------

    In conjunction with the performance standards, the Commission is 
adopting certain design standards. For example, with respect to 
delivery requirements, as discussed in Section II.C.3.c above, in an 
alternative to the proposal, we replaced a performance standard with a 
design standard to clarify requirements and reduce operational and 
supervisory burdens. Specifically, we proposed a performance standard 
that would have required a firm to deliver a relationship summary to an 
existing client or customer when changes are made to the existing 
account that would ``materially change the nature and scope of the 
relationship.'' This requirement would have required analysis about 
facts and circumstances and commenters expressed concern that it would 
impose operational and supervisory burdens. In response, we replaced 
the standard of ``materially change the nature and scope of the 
relationship'' with two, more specific and easily identifiable, 
triggers that we believe would not implicate the same operational or 
supervisory burdens described by commenters to meet the proposed 
requirement. Therefore, the final requirements set forth specific 
triggers that require re-delivery of the relationship summary in 
situations that the proposed ``material changes'' language sought to 
address, but are presented as a design standard rather than a 
performance standard and, as a result, are designed to ease burdens for 
all firms, including small entities.
    The relationship summary includes design standards to more easily 
allow for comparability among firms. These requirements specify the 
headings and sequence of the topics; prohibit disclosure other than the 
disclosure that is required or permitted; limit the length of the 
relationship summary; and require limited prescribed language in 
certain sections. The Commission considered alternative performance 
standards such as unlimited page numbers and not prohibiting disclosure 
other than the disclosure that is required or permitted. However, as 
discussed in Section II.A.1 above, we believe that retail investors 
will benefit from receiving a relationship summary that contains high-
level information, with the ability to access more detailed 
information. We also believe that the relationship summary should 
present information that is responsive and relevant to the topics 
covered by the final instructions. We believe that allowing only the 
mandatory or permissible information will promote consistency of 
information presented to investors, and allow investors to focus on 
relevant information that is helpful in deciding among firms. We 
believe that the design standards that we are adopting will provide 
comparative information in a user-friendly format that helps retail 
investors with informed decision making.
    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 retail investors receive certain 
information in a manner that promotes comparability.
    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 new requirements, 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 firms, it would be inconsistent with the purposes of 
the Advisers Act and Exchange Act to specify differences for small 
entities under the final requirements. As discussed above, we believe 
that the new requirements will result in multiple benefits to all 
retail investors, including alerting retail investors to certain 
information to consider when deciding whether to (i) establish an 
investment advisory or brokerage relationship, (ii) engage a particular 
firm or financial professional, or (iii) terminate or switch a 
relationship or specific service.\1523\ In addition, the content of the 
relationship summary will facilitate comparisons across firms.\1524\ We 
believe that providing this information at the prescribed timeframes is 
appropriate and in the public interest and will improve investor 
protection by helping retail investors to make a more informed choice 
among the types of firms and services available to them. Because 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 will be inconsistent with the purpose 
of the relationship summary to specify different requirements for small 
entities.\1525\
---------------------------------------------------------------------------

    \1523\ See supra Sections IV and VI.A.
    \1524\ See supra Sections I and IV.
    \1525\ See supra Sections I and IV (discussing investor 
confusion).
---------------------------------------------------------------------------

VII. Statutory Authority

    The Commission is adopting 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 adopting 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 adopting 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 adopting 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 adopting amendments to 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 adopting 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 sections 3, 
10, 15, 15(c)(6), 15(l), 17, 23 and 36 thereof 15 U.S.C. 78c, 78j, 78o, 
78o(c)(6), 78o(l), 78q, 78w and 78mm, and section 913(f) of Title IX of 
the Dodd-Frank Act.
    The Commission is adopting amendments to rule 800 under the 
Organization; Conduct and Ethics; and Information and Requests pursuant 
to the authority set forth in PRA sections 3506 and 3507 [44 U.S.C. 
3506, 3507].

Text of the Rule and Form

List of Subjects in

CFR Part 200

    Administrative practice and procedure, Organization and functions 
(Government agencies).

[[Page 33629]]

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.

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

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

Subpart N--Commission Information Collection Requirements Under the 
Paperwork Reduction Act: OMB Control Numbers

0
1. The authority citation for part 200 subpart N continues to read as 
follows:

    Authority:  44 U.S.C. 3506; 44 U.S.C. 3507.


0
2. In Sec.  200.800, the table in paragraph (b) is amended by adding an 
entry in numerical order by part and section number for ``Form CRS'' to 
read as follows:


Sec.  200.800   OMB control numbers assigned pursuant to the Paperwork 
Reduction Act.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                       17 CFR part or
                                        section where      Current OMB
 Information collection requirement    identified and      control No.
                                          described
------------------------------------------------------------------------
 
                              * * * * * * *
Form CRS............................           249.640         3235-0766
 
                              * * * * * * *
------------------------------------------------------------------------

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

0
3. The general authority citation for part 240 continues to read as 
follows and sectional authority for 240.17a-14 is 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 240.17a-14 is also issued under Public Law 111-203, sec. 
913, 124 Stat. 1376 (2010).
* * * * *

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 Central Registration Depository (``Web CRD[supreg]'') 
operated by the Financial Industry Regulatory Authority, Inc., and 
thereafter, file an amended Form CRS in accordance with the 
instructions in Form CRS.
    (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 earliest of:
    (i) A recommendation of an account type, a securities transaction; 
or an investment strategy involving securities;
    (ii) Placing an order for the retail investor; or
    (iii) The opening of a brokerage account for the retail investor.
    (2) Deliver to each retail investor who is an existing customer 
your current Form CRS before or at the time you:
    (i) Open a new account that is different from the retail investor's 
existing account(s);
    (ii) Recommend that the retail investor roll over assets from a 
retirement account into a new or existing account or investment; or
    (iii) Recommend or provide a new brokerage service or investment 
that does not necessarily involve the opening of a new account and 
would not be held in an existing account.
    (3) Post the current Form CRS prominently on your public 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 60 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 through another disclosure that is 
delivered 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:

[[Page 33630]]

    (1) Current Form CRS means the most recent version of the Form CRS.
    (2) Retail investor means a natural person, or the legal 
representative of such natural person, who seeks to receive or receives 
services primarily for personal, family or household purposes.
    (f) Transition rule. (1) If you are registered with the Commission 
prior to June 30, 2020, pursuant to Section 15 of the Act, you must 
file your initial Form CRS with the Commission in accordance with 
section (b)(2) of this section, beginning on May 1, 2020, and by no 
later than June 30, 2020.
    (2) On or after June 30, 2020, if you file an application for 
registration with the Commission or have an application for 
registration pending with the Commission as a broker or dealer pursuant 
to Section 15 of the Act, you must begin to comply with this section by 
the date on which your registration application becomes effective 
pursuant to Section 15 of the Act, including by filing your Form CRS in 
accordance with paragraph (b)(2) of this section.
    (3) Within 30 days after the date by which you are first required 
by paragraph (f) of this section to electronically file your initial 
Form CRS with the Commission, you must deliver to each of your existing 
customers who is a retail investor your current Form CRS.
    (4) As of the date by which you are first required to 
electronically file your Form CRS with the Commission pursuant to this 
section, you must begin using your Form CRS as required to comply with 
paragraph (c) of this rule.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
7. The authority citation for part 249 is amended by revising the 
general authority and adding sectional authority for 249.640 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 249.641 is added to subpart G read as follows:


Sec.  249.641   Form CRS, Relationship Summary for Brokers and Dealers 
Providing Services to Retail Investors, pursuant to Sec.  240.17a-14 of 
this chapter.

    This form shall be prepared and filed by brokers and 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 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.

    Note 1 to paragraph (a)(1):  Information on how to file with the 
IARD is available on the Commission's website 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.

    (2)(i) On or after June 30, 2020, 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.
    (ii) Beginning on May 1, 2020, any initial application for 
registration as an investment adviser filed prior to June 30, 2020, 
must include a Form CRS that satisfies the requirements of Part 3 of 
Form ADV by no later than June 30, 2020.
* * * * *

0
11. Amend Sec.  275.204-1 by revising paragraphs (a) and (b) and adding 
paragraph (e) 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 (c) 
of this section, 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.
* * * * *
    (e) Transition to Filing Form CRS. If you are registered with the 
Commission or have an application for registration pending with the 
Commission prior to June 30, 2020, you must amend your Form ADV by 
electronically filing with IARD your initial Form CRS that satisfies 
the requirements of Part 3 of Form ADV (as amended effective September 
30, 2019) beginning on May 1, 2020 and by no later than June 30, 2020.

    Note 1 to paragraphs (e):  This note applies to paragraphs (a), 
(b), and (e) of this section. Information on how to file with the 
IARD is available on our website 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:

[[Page 33631]]

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 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 you:
    (i) Open a new account that is different from the retail investor's 
existing account(s);
    (ii) Recommend that the retail investor roll over assets from a 
retirement account into a new or existing account or investment; or
    (iii) Recommend or provide a new investment advisory service or 
investment that does not necessarily involve the opening of a new 
account and would not be held in an existing account.
    (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 60 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 through another disclosure that is delivered 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 natural person, or the legal 
representative of such natural person, who seeks to receive or receives 
services primarily for personal, family or household purposes.
    (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 comply with 
the requirements of paragraph (b) of this section.

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 
1940

0
14. 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.

    Note: The following amendment does not appear in the Code of 
Federal Regulations.


0
15. Form ADV [referenced in Sec.  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.

    Dated: June 5, 2019.

    By the Commission.
Vanessa A. Countryman,
Acting Secretary.

    Note: The appendices will not appear in the Code of Federal 
Regulations.

Appendices

BILLING CODE 8011-01-P

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[FR Doc. 2019-12376 Filed 7-11-19; 8:45 am]
BILLING CODE 8011-01-C

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