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

    \404\ See, e.g., NASAA Letter (stating that ``Form CRS should
specify minimum account size and include information on
miscellaneous fees different categories of investors can expect to
pay.''); Cetera August 2018 Letter (stating that Form CRS should
include ``[w]hether or not the firm has established standards for
the minimum or maximum dollar amount of various account types;'' and
submitting mock-up form that include disclosures of account
minimums); Primerica Letter. See Relationship Summary Adopting
Release.
    \405\ See Relationship Summary Adopting Release.
---------------------------------------------------------------------------

Other Material Facts Related to the Scope and Terms of the Relationship
    In the Proposing Release, although we identified the broker-
dealer's capacity, fees and charges, and type and scope of services
provided as examples of what would generally be considered ``material
facts relating to the scope and terms of the relationship with the
retail customer,'' we noted that the Disclosure Obligation would also
require broker-dealers and their associated persons to determine, based
on the facts and circumstances, whether there are other material facts
relating to the scope and terms of the relationship that would need to
be disclosed.\406\ We also asked for comment on whether examples of
other information relating to scope and terms of the relationship
should be highlighted by the Commission as likely to be considered a
material fact relating to the scope and terms of the relationship that
would need to be disclosed.\407\
---------------------------------------------------------------------------

    \406\ See Proposing Release at 21600-21601.
    \407\ See Proposing Release at 21607.
---------------------------------------------------------------------------

    A number of commenters provided suggestions of additional examples
of such material facts that the Commission should highlight or
explicitly require to be disclosed as a ``material fact relating to the
scope and terms of the relationship.'' Specifically, commenters raised
whether a broker-dealer's basis for,\408\ and risks associated
with,\409\ a recommendation, or the standard of conduct applicable to a
broker-dealer making a recommendation,\410\ should be material facts
relating to the scope and terms of the relationship.
---------------------------------------------------------------------------

    \408\ See infra footnote 411.
    \409\ See infra footnote 412.
    \410\ See infra footnote 417.
---------------------------------------------------------------------------

Basis for and Risks Associated With the Recommendation
    The Proposing Release did not address whether a broker-dealer's
basis for a recommendation is a ``material fact relating to the scope
and terms of the relationship.'' However, several commenters requested
that the Commission treat a broker-dealer's basis for a recommendation
as a ``material fact relating to the scope and terms of the
relationship'' that would likely need to be disclosed prior to, or at
the time of the recommendation, pursuant to the Disclosure
Obligation.\411\ Similarly, several commenters suggested that the
Commission should treat risks associated with a broker-dealer's
recommendation as ``material facts relating to the scope and terms of
the relationship'' that would likely need to be disclosed prior to, or
at the time of the recommendation.\412\ Other commenters opposed
requiring particularized disclosure of the basis of individual
recommendations, stating that it is sufficient to disclose that
different products are available with different features rather than
require firms specify why the broker-dealer recommended one product
over another.\413\
---------------------------------------------------------------------------

    \411\ See, e.g., PIABA Letter (recommending that broker-dealers
be required to provide a clear and understandable explanation as to
the other lower cost investments which are available, and why the
higher cost investment is being recommended); Morningstar Letter
(recommending that the Commission require a firm to disclose its
analysis of the reasons it is recommending a rollover from an ERISA-
covered retirement plan to an IRA and why it is in the participant's
best interest).
    \412\ See, e.g., PIABA Letter (recommending that the Commission
extend the Disclosure Obligation to include the risks, benefits, and
ramifications of a recommendation).
    \413\ See, e.g., LPL August 2018 Letter (stating that a broker-
dealer could satisfy the Care Obligation if it recommends a more
expensive investment product so long as it discloses that the
recommended product is not the least expensive among the
alternatives and is otherwise in the investor's best interest);
Committee of Annuity Insurers Letter (recommending that the
Commission clarify that a broker-dealer could satisfy the Disclosure
Obligation through the use of a disclosure describing the products
and services available to its retail customers and related conflicts
of interest, and that a broker-dealer or associated person need not
provide a disclosure particularized to a recommendation). See also
CCMC Letters (requesting that the SEC confirm that it is sufficient
to disclose that different products are available with different
features rather than require firms to also document why the firm
recommended one product over another); IPA Letter (requesting
additional guidance regarding specificity of disclosure needed to
demonstrate why a broker-dealer recommended one of multiple
different products (with different terms, cost structures and
conditions) that each meet the customer's investment objective).
---------------------------------------------------------------------------

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

particular disclosure by a broker-dealer is sufficient to meet the
Disclosure Obligation will depend on the facts and circumstances.
    The risks associated with a particular recommendation would be
relevant to a retail customer. However, we believe that broker-dealers
may rely on the existing disclosure regime governing securities issuers
to disclose the risks associated with any issuer, security or
offering,\414\ and it is not our intent to require the broker-dealer to
duplicate or expand on those disclosures. Consistent with our approach,
discussed above, to disclosure of product-level fees and costs, we
believe that describing product-level risks in standardized terms, with
additional information in any available issuer disclosure documents
delivered in accordance with existing regulatory requirements would
satisfy the Disclosure Obligation. As noted above, we are not seeking
to supplant the developed regulatory regime currently applicable to
offering disclosure with the adoption of Regulation Best Interest.
---------------------------------------------------------------------------

    \414\ See, e.g., Item 503(c) of Reg. S-K (requiring disclosure
of the ``most significant'' factors that make an offering
``speculative or risky,'' as well as an explanation of how each risk
``affects the issuer or the securities being offered.'' See also
Form 10-K (requiring a description of the 503(c) risk factors that
are ``applicable to the registrant''). In some cases, SRO Rules
applicable to recommendations of particular securities may also
require disclosure of risks. See, e.g., FINRA Rule 2330 (requiring a
FINRA member or its associated persons recommending deferred
variable annuity to have a reasonable belief that the customer has
been informed of, among other things, market risk). See also FINRA
Rule 2210(d), requiring, among other things, that statements in
member communications ``are clear and not misleading within the
context in which they are made, and that they provide balanced
treatment of risks and potential benefits.''
---------------------------------------------------------------------------

    While we believe that a standardized discussion of risks is a
material fact that must be disclosed to satisfy the Disclosure
Obligation, we decline to impose a disclosure requirement specific to
each recommendation. As with regard to the disclosure of the
individualized basis for each recommendation, we believe that such
specific disclosure could involve significant costs and in many cases
simply repeat the more standardized disclosure that we are requiring,
which we believe will sufficiently inform retail customers, in broad
terms, of the nature of the risks associated with a recommendation.
    In addition, under the Care Obligation, a broker-dealer making a
recommendation of a securities transaction or investment strategy
involving securities to a retail customer must consider the risks when
determining whether it has a reasonable basis for believing that the
recommended transaction or investment strategy could be in the best
interest of at least some retail customers, and is in the best interest
of a particular retail customer. Moreover, under paragraph (a)(2)(B) of
Regulation Best Interest, discussed below, broker-dealers need to
disclose ``all material facts relating to conflicts of interest that
are associated with the recommendation,'' which will require disclosure
of what we believe to be a significant risk associated with a broker-
dealer's recommendations--the broker-dealer's conflicts of interest.
For these reasons, we believe that standardized written disclosure of
this information in general terms is sufficient.
    Consistent with the Compliance Obligation, broker-dealers should
consider developing policies and procedures that address the
circumstances under which the basis for a particular recommendation
would be disclosed to a retail customer. As a best practice, firms also
should encourage their associated persons to discuss the basis for any
particular recommendation with their retail customers, including the
associated risks, particularly where the recommendation is significant
to the retail customer. For example, the decision to roll over a 401(k)
into an IRA may be one of the most significant financial decisions a
retail investor could make. Thus, a broker-dealer should discuss the
basis of such recommendations with the retail customer. Similarly, we
encourage broker-dealers to record the basis for their recommendations,
especially for more complex, risky or expensive products and
significant investment decisions, such as rollovers and choice of
accounts, as a potential way a broker-dealer could demonstrate
compliance with the Care Obligation.
Standard of Conduct \415\
---------------------------------------------------------------------------

    \415\ See Section II.C.1.a, Disclosure Obligation, Capacity in
Which the Broker-Dealer is Acting.
---------------------------------------------------------------------------

    As stated in the Proposing Release, the Commission intended the
Relationship Summary to touch on issues that are also contemplated
under the Disclosure Obligation, such as facilitating greater awareness
of key aspects of a relationship with a firm or financial professional,
such as the applicable standard of conduct.\416\ Several commenters on
Regulation Best Interest also requested that the Commission treat the
standard of conduct applicable to a broker-dealer making the
recommendation to its retail customer as a ``material fact relating to
the scope and terms of the relationship'' that would likely need to be
disclosed prior to, or at the time of the recommendation under the
Disclosure Obligation.\417\ Specifically, these commenters requested
that the Commission require a firm to disclose whether it is providing
a recommendation subject to Regulation Best Interest or advice subject
to a fiduciary duty.\418\
---------------------------------------------------------------------------

    \416\ See Proposing Release at 21600.
    \417\ See, e.g., NASAA 2018 Letter (recommending that the
Commission provide specific instructions on how associated persons
of dually registered firms should disclose capacity in which they
are acting and whether the information they are providing is a
recommendation subject to ``best interest'' or advice subject to a
fiduciary duty). See also Betterment Letter (recommending that the
Commission require broker-dealers to disclose that they are
``salespeople who are providing sales recommendations and not
advice'' in lieu of the adoption of a fiduciary duty on broker-
dealers).
    \418\ Id.
---------------------------------------------------------------------------

    The Commission also carefully considered numerous comments
concerning the standard of conduct disclosure in proposed Form CRS,
along with the results of investor testing and the Commission's
Feedback Form.\419\ As discussed more fully in the Relationship Summary
Adopting Release, we are adopting a requirement in Form CRS for a
description of a firm's applicable standard of conduct using prescribed
wording.\420\ This ``standard of conduct'' disclosure (as modified from
proposed Form CRS) both eliminates technical words, such as
``fiduciary,'' and describes the legal obligations of broker-dealers,
investment advisers, or dual-registrants using similar terminology in
plain English. The prescribed wording

also highlights when a firm must satisfy its legal obligation--
specifically, in the case of a broker-dealer, when making a
recommendation.
---------------------------------------------------------------------------

    \419\ Most commenters did not object to the proposal's
requirement that broker-dealers and investment advisers provide
disclosure regarding their standards of conduct or that such
disclosure be standardized. See, e.g., CFA Institute Letter (urging
the Commission to require disclosure of the standard of conduct
under which broker-dealers operate); IAA August 2018 Letter. In
addition, results of investor studies and surveys indicate that
retail investors view this information as helpful. See RAND 2018
(almost one third of survey respondents selected this section as one
of the two most useful; Letter from Mark Quinn, Director of
Regulatory Affairs, Cetera (Nov. 19, 2018) (``Cetera November 2018
Letter'') (88% of survey respondents somewhat or strongly agreed
``the firm's obligations to you'' is an important topic''). See also
Schwab Letter I (Hotspex) (``obligations the firm and its
representatives owe me'' ranked third where survey participants were
asked to identify four topics as most important for a firm to
communicate''). Similarly, commenters on Feedback Forms found this
information to be useful. See Feedback Forms Comment Summary (38% of
commenters on Feedback Forms graded the ``Our Obligations to You''
section of the relationship summary as ``very useful'' and 46%
graded this section as ``useful'').
    \420\ Form CRS, Item 3.B.(i).a (stating that ``If you are a
broker-dealer that provides recommendations subject to Regulation
Best Interest, include: `When we provide you with a recommendation,
we have to act in your best interest and not put our interest ahead
of yours' '').
---------------------------------------------------------------------------

    We believe the standard of conduct owed to a retail customer under
Regulation Best Interest is a material fact relating to the scope and
terms of the relationship. However, given that Form CRS requires firms
to disclose in prescribed language the applicable standard of conduct
and, as discussed above, the Disclosure Obligation requires broker-
dealers to disclose the capacity (i.e., brokerage) in which they are
acting with respect to a recommendation, we believe this disclosure to
be sufficient and thus requiring any additional disclosure would be
duplicative.
b. Material Facts Regarding Conflicts of Interest
    As noted above, in addition to requiring disclosure of the
``material facts relating to the scope and terms of the relationship,''
the proposed Disclosure Obligation would have required a broker-dealer
to disclose ``all material conflicts of interest associated with the
recommendation.'' We proposed to interpret a ``material conflict of
interest'' as a conflict of interest that a reasonable person would
expect might incline a broker-dealer--consciously or unconsciously--to
make a recommendation that is not disinterested.'' \421\ We generally
modeled this proposed interpretation on the Advisers Act approach to
identifying conflicts of interest for which investment advisers may
face antifraud liability in the absence of full and fair
disclosure.\422\ We expressed our preliminary belief that a material
conflict of interest that generally should be disclosed would include
material conflicts associated with recommending: Proprietary products,
products of affiliates, or a limited range of products, or one share
class versus another share class of a mutual fund; securities
underwritten by the broker-dealer or an affiliate; the rollover or
transfer of assets from one type of account to another (such as a
recommendation to roll over or transfer assets in an ERISA account to
an IRA); and allocation of investment opportunities among retail
customers (e.g., IPO allocation).\423\
---------------------------------------------------------------------------

    \421\ Proposing Release at 21602.
    \422\ See id. (citing Capital Gains (stating that as part of its
fiduciary duty, an adviser must fully and fairly disclose to its
clients all material information in accordance with Congress's
intent ``to eliminate, or at least expose, all conflicts of interest
which might incline an investment adviser--consciously or
unconsciously--to render advice which was not disinterested'')).
    \423\ See Proposing Release at 21603.
---------------------------------------------------------------------------

    While commenters supported the disclosure of conflicts of interest,
some sought clarity on the standard for determining which conflicts
should be disclosed,\424\ and others requested clarity on whether
conflicts involving certain actions (e.g., rollovers) \425\ and
products (e.g., proprietary products) \426\ should be disclosed.\427\
---------------------------------------------------------------------------

    \424\ See, e.g., SIFMA August 2018 Letter, Edward Jones Letter
(requesting clarity on the definition of materiality with regards to
conflicts); Ameriprise Letter (stating that the definition of
``material conflicts of interest'' should follow well known and
understood principles); Fidelity Letter (stating that the Commission
should not distinguish between conflicts of interest based on
financial incentives and all other conflicts of interest); Morgan
Stanley Letter; CCMC Letters; TIAA Letter; Mass Mutual Letter;
Empower Letter. See also IRI Letter (stating that requiring a
registered representative to predict what a hypothetical reasonable
person might think is confusing); ICI Letter (stating that rather
than focusing on what a ``reasonable person would expect . . .'' the
standard should focus on that nature of the incentive and its effect
on a broker-dealer's conduct).
    \425\ See, e.g., CFA Institute Letter.
    \426\ See, e.g., SIFMA August 2018 Letter; State Attorneys
General Letter; CFA Institute Letter.
    \427\ See, e.g., Ameriprise Letter; State Attorneys General
Letter; CFA August 2018 Letter.
---------------------------------------------------------------------------

    Several commenters urged the Commission to define ``conflicts of
interest'' without a reference to the terms ``consciously or
unconsciously.'' \428\ These commenters claim that discerning a
broker's conscious or unconscious state of mind is ``confusing and
inherently unknowable.'' \429\ Similarly, one commenter stated that a
broker-dealer would be unable to draft adequate policies and procedures
that address an individual's mindset, noting that it would be
impossible for a broker-dealer to anticipate an individual's
unconscious conflicts.\430\ Instead, these commenters suggested revised
language that eliminates the notion of conscious or unconscious
inclination.\431\ Similarly, several commenters opposed the
Commission's use of the term ``not disinterested.'' \432\ These
commenters believe that the term is not clear and could, among other
things, suggest the elimination of all conflicts.\433\ One of these
commenters recommended that the Commission eliminate the term ``not
disinterested'' \434\ while another suggested that the Commission
clarify whether ``material'' and ``not disinterested'' are intended to
be identical or different standards for brokers and advisers.\435\
Other commenters opposed the proposed standard, arguing that it was not
as broad as the disclosure obligation applicable to investment
advisers. In particular, some commenters urged the Commission to apply
the standard for disclosure applicable to investment advisers as
articulated by the Supreme Court in SEC. v. Capital Gains Research
Bureau.\436\ Specifically, commenters requested that the Commission
require disclosure of not only material conflicts but also the material
facts related to a recommendation.\437\
---------------------------------------------------------------------------

    \428\ See, e.g., Edward Jones Letter (urging the Commission to
articulate a definition of materiality that does not refer to a
person's unconscious activity); Empower Letter; Ameriprise Letter.
    \429\ Id.
    \430\ See Great-West Letter.
    \431\ See, e.g., Edward Jones Letter (suggesting that the
Commission define ``material conflict'' as an activity that: (i)
Affects financial compensation of a person making a recommendation;
and (ii) a reasonable investor would likely view as important to the
total mix of information available when considering that
recommendation); Ameriprise Letter (suggesting that the Commission
define ``material conflict of interest'' as a conflict of interest
that a reasonable person might conclude has the potential to
influence the recommendation); Pacific Life August 2018 Letter
(suggesting the Commission define ``material conflict of interest''
as a financial interest of the financial professional making a
recommendation that a reasonable person would expect to affect the
impartiality of such recommendation).
    \432\ See, e.g., IPA Letter (stating that the use of the term
``not disinterested'' may require unnecessary legal interpretation);
Empower Letter.
    \433\ See, e.g., Empower Letter.
    \434\ See id.
    \435\ See IPA Letter.
    \436\ 375 U.S. 180 (1963). See, e.g., CFA August 2018 Letter;
Schnase Letter.
    \437\ See, e.g., CFA August 2018 Letter.
---------------------------------------------------------------------------

    We are adopting the obligation to disclose conflicts of interest,
with several modifications and clarifications to the Proposing Release.
Specifically, Paragraph (a)(2)(i)(B) of Regulation Best Interest
requires that broker-dealers disclose ``material facts relating to
conflicts of interest that are associated with the recommendation.''
\438\
---------------------------------------------------------------------------

    \438\ This supplements the disclosure required in the
Relationship Summary regarding ways in which the broker-dealer and
its affiliates make money from brokerage or investment advisory
services they provide to retail investors, and about the related
material conflicts of interest. The Relationship Summary requires
firms to disclose, if applicable, conflicts related to compensation
it could receive from proprietary products, third-party payments,
revenue sharing, or principal trading. If firms do not have any of
these conflicts, the firm must disclose at least one other material
conflict of interest that affects retail investors. As described in
the Relationship Summary Adopting Release, we declined to make a
change pursuant to comments that suggested that Regulation Best
Interest's and Form CRS's conflicts disclosures be coordinated, and
that any conflict disclosure obligations under Regulation Best
Interest should be satisfied upon delivery of the Relationship
Summary. We recognize that broker-dealers may need to disclose
additional conflicts at a point in time other than at the beginning
of the relationship with a retail investor. Broker-dealers also may
need to include additional information about conflicts of interest
summarized in the Relationship Summary. The Relationship Summary
will provide a high-level summary for retail investors so that they
can engage in a conversation with their financial professional about
investment advisory or brokerage services, and so that the retail
investors can choose the type of service that best meets their
needs, but will not necessarily include all material facts related
to a particular conflict of interest. We believe many firms may not
be able to capture all of the necessary disclosures about their
conflicts in this short standardized disclosure.

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

    However, as discussed in more detail below, in response to comments
and in the light of the Relationship Summary, we are: (1) Adopting for
purposes of Regulation Best Interest a definition of ``conflict of
interest'' associated with a recommendation ``as an interest that might
incline a broker, dealer, or a natural person who is an associated
person of a broker or dealer--consciously or unconsciously--to make a
recommendation that is not disinterested;'' and (2) revising the
Disclosure Obligation to require disclosure of ``material facts''
regarding such conflicts of interest. Under this approach, all
conflicts of interest as interpreted under the Proposing Release will
be covered by Regulation Best Interest.
    We believe distinguishing between ``conflicts of interest'' and
``material facts'' regarding such conflicts that would be disclosed
would make the Disclosure Obligation more consistent with the
proposal's intent. In the Proposing Release, the Commission discussed
limiting the disclosure of conflicts under the Disclosure Obligation
``consistent with case law under the antifraud provisions, which limit
disclosure obligations to ``material facts.''
    After considering the comments, we have determined to retain the
proposed approach to conflicts of interest as described in Capital
Gains. In particular, we acknowledge commenter concerns about
discerning a broker's conscious or unconscious state of mind. However,
the description of conflicts of interest in Capital Gains is well
established, familiar to many in the industry, particularly dual-
registrants, and guidance already exists regarding what constitutes a
conflict of interest under this standard. To provide clarity that this
interpretation is limited to Regulation Best Interest, however, we are
revising Regulation Best Interest to explicitly provide that a
``conflict of interest'' ``means an interest that might incline a,
broker, dealer, or natural person who is an associated person of a
broker-dealer--consciously or unconsciously--to make a recommendation
that is not disinterested,'' \439\ consistent with the scope of the
meaning of ``conflict of interest'' for investment advisers under
Capital Gains.\440\
---------------------------------------------------------------------------

    \439\ Rule 15l-1(b)(3).
    \440\ For the same reasons, we have eliminated the phrase ``a
reasonable person would expect'' that was included in the definition
of ``material conflict of interest'' discussed in the Proposing
Release at 21602.
---------------------------------------------------------------------------

    Several commenters also made suggestions regarding the Commission's
interpretation of the term ``material'' as used in the proposed
Disclosure Obligation (i.e., the proposed requirement to disclose ``all
material conflicts of interest that are associated with the
recommendation'').\441\ Many commenters agreed with the Commission's
decision to use a ``materiality'' standard to determine those facts
about conflicts of interest that must be disclosed.\442\ However,
several other commenters asked the Commission to clarify the meaning of
``material.'' \443\ These latter commenters stated, among other things,
that the term ``material'' in proposed Regulation Best Interest was not
clearly defined and would be subjectively interpreted.\444\
Accordingly, many of these commenters recommended that the Commission
adopt a materiality standard based on the standard articulated in Basic
v. Levinson.\445\
---------------------------------------------------------------------------

    \441\ See, e.g., Transamerica August 2018 Letter; Fidelity
Letter; SIFMA August 2018 Letter; Morgan Stanley Letter; IPA Letter;
Great-West Letter.
    \442\ See, e.g., Morgan Stanley Letter; Great-West Letter.
    \443\ See, e.g., FSI August 2018 Letter (recommending the
Commission publish examples of when a conflict is material); Wells
Fargo Letter; Cetera August 2018 Letter; IPA Letter.
    \444\ See, e.g., Great-West Letter (stating that the Commission
appears to have created a very subjective standard to determine
materiality).
    \445\ See, e.g., Mass Mutual Letter; SIFMA August 2018 Letter;
Bank of America Letter; CCMC Letters; TIAA Letter; Cetera August
2018 Letter; Fidelity Letter.
---------------------------------------------------------------------------

    The Supreme Court in Basic articulated a standard for materiality,
stating that information is material if there is ``a substantial
likelihood that a reasonable shareholder would consider it important.''
\446\ This definition of ``material'' is well established and thus
limiting disclosure to material facts in the Disclosure Obligation will
eliminate confusion and reduce the compliance burden on broker-dealers
in fulfilling the Disclosure Obligation. It will also help focus the
information made available to retail customers.\447\ Accordingly, we
interpret ``material facts'' consistent with the Basic standard.
Moreover, while the Regulation Best Interest definition of ``conflict
of interest'' is modeled on the regulatory regime applicable to
investment advisers, and is not by its terms explicitly limited to
``material'' conflicts of interest, it would be difficult to envision a
``material fact'' that must be disclosed pursuant to the Disclosure
Obligation that is not related to a conflict of interest that is also
material under the Basic standard.\448\
---------------------------------------------------------------------------

    \446\ Basic v. Levinson.
    \447\ As stated in the Proposing Release, we are sensitive to
the potential that broker-dealers could adopt an approach that
results in lengthy disclosures that undermine the Commission's goal
of facilitating meaningful disclosure to assist retail customers in
making informed investment decisions. Proposing Release at 21604.
    \448\ See Fiduciary Interpretation.
---------------------------------------------------------------------------

Interpretation of Disclosure of Material Facts Relating to Conflicts of
Interest
    In response to comments, we are providing our view regarding what
we would consider ``material facts relating to conflicts of interest
that are associated with a recommendation'' that would need to be
disclosed under the Disclosure Obligation. We believe the conflicts of
interest identified in the Relationship Summary may provide a useful
starting point for the identification of material facts that need to be
disclosed pursuant to the Disclosure Obligation.\449\ In addition, we
also view how a broker-dealer's investment professionals are
compensated, and the conflicts associated with those arrangements, as
material facts relating to conflicts of interest that are associated
with a recommendation.\450\ While these conflicts of interest must be
summarized in the Relationship Summary to the extent they are
applicable, we believe that additional details regarding many of these
conflicts need to be disclosed under the Disclosure Obligation as
``material facts'' relating to conflicts of interest associated with a
recommendation.
---------------------------------------------------------------------------

    \449\ See, e.g., Form CRS, Item 3 (Fees, Costs, Conflicts, and
Standard of Conduct).
    \450\ See Form CRS, Item 3.C.(i) (``Description of How Financial
Professionals Make Money: Summarize how your financial professionals
are compensated, including cash and non-cash compensation, and the
conflicts of interest those payments create.'').
---------------------------------------------------------------------------

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

different product providers (e.g., mutual funds) for a variety of
reasons, such as payments for inclusion on a broker-dealer's menu of
products offered (sometimes referred to as shelf space). These
compensation arrangements create a variety of conflicts of interest
that must be addressed under both Form CRS and the Disclosure
Obligation.
---------------------------------------------------------------------------

    \451\ See NASD NTM 03-54.
---------------------------------------------------------------------------

    We believe that compensation associated with recommendations to
retail customers and related conflicts of interest--whether at the
broker-dealer or the associated person level--is a conflict of interest
about which material facts must be disclosed as part of the Disclosure
Obligation. This disclosure should summarize how the broker-dealer and
its financial professionals are compensated for their recommendations
and, as importantly, the conflicts of interest that such compensation
creates. This summary should include the sources and types of
compensation received, and may include the fact that fees and costs
disclosed pursuant to Paragraph (a)(2)(i)(A) of Regulation Best
Interest that a retail customer may pay directly or indirectly are a
source of compensation, if that is the case. For example, if a broker-
dealer receives compensation derived from the sale of securities or
other investment products held by retail customers of the firm,
including asset-based sales charges or service fees on mutual funds,
that fact and the conflicts associated with the receipt of such
compensation should be fully and fairly described.
    Broker-dealers could meet the Disclosure Obligation by making
certain required disclosures of information regarding conflicts of
interest to their customers at the beginning of a relationship, and
this form of disclosure may be standardized. However, if standardized
disclosure, provided at such time, does not sufficiently identify the
material facts relating to conflicts of interest associated with any
particular recommendation, the disclosure would need to be supplemented
so that such disclosure is tailored to the particular recommendation.
For example, with regard to mutual fund transactions and holdings, a
broker-dealer might disclose broadly that it is compensated by funds
out of product fees or by the funds' sponsors, and that such
compensation gives it an incentive to recommend certain products over
other products for which the broker-dealer receives less compensation;
later, when a broker-dealer recommends a particular fund, it could
provide more specific detail about compensation arrangements, for
example revenue sharing associated with the fund family. In the
alternative, so long as the ``material facts'' regarding the conflicts
associated with a recommendation of a mutual fund were disclosed at the
outset of the relationship, no further disclosure need be made at the
time of recommendation; we are not requiring that information regarding
conflicts be disclosed on a recommendation-by-recommendation basis.
    The Disclosure Obligation also does not require specific written
disclosure of the amounts of compensation received by the broker-dealer
or the financial representative. For example, we are not requiring
broker-dealers to disclose the amount, if any, they compensate their
financial professionals per transaction, or for year-end bonuses. We
believe that disclosure of the material facts regarding conflicts of
interest associated with a recommendation need not entail such
individualized numerical disclosure, and that in any event such a level
of detail may be difficult and costly to calculate with accuracy, and
also confusing to investors in many instances. Instead, disclosure
regarding conflicts must reasonably inform investors so that the
investor may use the information to evaluate the recommendation, and
that can be done without specific disclosure of the amount of the
compensation. Although disclosure of specific compensation amounts is
not required, depending on facts and circumstances, full and fair
disclosure may require disclosure of the general magnitude of the
compensation.\452\
---------------------------------------------------------------------------

    \452\ See, e.g., Advantage Investment Management, Advisers Act
Release No. 4455 (Jul. 18, 2016) (settled order) (the Commission
brought an enforcement action against an adviser for failing to
disclose the existence, nature and magnitude of a forgivable loan
from a broker-dealer that the adviser had engaged to provide
services to the adviser's clients); Taberna Capital Management LLC,
Advisers Act Release No. 4186 (Sep. 2, 2015) (settled order) (the
Commission brought an enforcement action against an adviser for
failing to disclose the existence, nature, and extent of a conflict
of interest raised by the adviser's receipt of certain fees from
issuers); BISYS Fund Services, Inc., Advisers Act Release No. 2554
(Sep. 26, 2006) (settled order) (the Commission brought an
enforcement action against a mutual fund administrator for failure
to disclose information concerning the existence or magnitude of the
conflicts of interest created by a marketing arrangement that called
for BISYS to rebate a portion of its administrative fees to 27
mutual fund advisers so that the fund advisers would continue to
recommend BISYS as an administrator).
---------------------------------------------------------------------------

    We are also clarifying that while product fees and costs can be a
significant source of compensation received by broker-dealers and
associated persons, no disclosure regarding the particular amounts of
these fees and costs is required under Regulation Best Interest with
regard to conflicts of interest. Instead, what must be disclosed under
Paragraph (a)(2)(i)(B) of Regulation Best Interest are the ``material
facts relating to conflicts of interest'' created by compensation
sourced from product fees and costs, rather than the fees and costs
themselves.
Differences in Compensation and Proprietary Products
    Several commenters recommended that required conflict disclosure
address recommendations where a less expensive alternative is
available, or condition the ability to recommend a more expensive
product on the adequacy of a broker-dealer's conflict disclosures.\453\
Similarly, several commenters expressed differing views on how payment
of varying compensation should be handled under the ``best interest''
standard of Regulation Best Interest and how related conflicts should
be disclosed.\454\ For example, one commenter identified compensation
differences within product lines as an example of a conflict that
should be disclosed.\455\ Several commenters also recommended that the
Commission require disclosure of conflicts of interest related to use
of proprietary products, and whether the broker-dealer offers
alternatives to proprietary products.\456\ Similarly, several
commenters requested that the Commission clarify that broker-dealers
can limit their offerings to proprietary products or products that make
revenue sharing payments if, among other

things, appropriate disclosure is made.\457\
---------------------------------------------------------------------------

    \453\ See PIABA Letter (stating that where less expensive
alternatives are available, disclosure should include an explanation
of why the recommendation is nevertheless in the best interest given
other factors associated with the recommendation); LPL August 2018
Letter (recommending that the Commission clarify that a broker-
dealer can recommend a product involving costs and charges that are
within a range of reasonableness that has been disclosed to the
investor in advance provided the recommendation is otherwise in the
investor's best interest); UMiami Letter; SIFMA August 2018 Letter.
    \454\ See, e.g., CFA August 2018 Letter (recommending that the
Commission include compensation differences within product lines as
an example of a conflict that should be disclosed); Ameriprise
(stating that differential compensation for diverse products aligns
with Regulation Best Interest provided the firm mitigates the
potential related conflicts); Pacific Life August 2018 Letter
(stating that the definition of ``material conflicts of interest''
must encompass, among other things, the types of compensation
received by the person making the recommendation).
    \455\ See CFA August 2018 Letter.
    \456\ See, e.g., Money Management Institute Letter (recommending
the SEC allow firms to meet the Conflict of Interest Obligation with
respect to their preference for proprietary products through
disclosure); CFA Institute Letter; IRI Letter; SIFMA August 2018
Letter.
    \457\ See, e.g., SIFMA August 2018 Letter (stating that a firm
should be allowed to limit its offerings to proprietary products or
revenue sharing products, as long as: (a) The broker-dealer
discloses to its customer that it is limiting the recommendation to
a specific set of securities, and (b) the specific set of securities
contains appropriate securities to meet the customer's needs); CFA
Institute Letter (stating that when a firm only offers proprietary
products it should disclose not only the higher product cost, but
the potential cost to the investor of such a limited offering).
---------------------------------------------------------------------------

    As discussed above, we agree with commenters who stated that it may
be compatible with the Care Obligation to recommend a more expensive
product that is otherwise in a retail customer's best interest when
there are less expensive alternatives available, to receive
compensation that varies among products, and to recommend proprietary
products.\458\ However, we also believe that the conflicts of interest
associated with such practices constitute ``material facts'' relating
to conflicts of interest that must be disclosed under the Disclosure
Obligation.
---------------------------------------------------------------------------

    \458\ See generally Section II.A.1, Commission's Approach.
---------------------------------------------------------------------------

    The receipt of higher compensation for recommending some products
rather than others, whether received by the broker-dealer, the
associated person, or both, is a fundamental and powerful incentive to
favor one product over another.\459\ While we are requiring firms to
establish policies and procedures reasonably designed to mitigate the
conflicts of interest that create an incentive for financial
professionals to place the interest of the professional or broker-
dealer ahead of the interest of the retail customer, we believe also
that full and fair disclosure of the material facts concerning
conflicts raised by variable compensation schemes is of particularly
critical importance for an investor seeking to evaluate a
recommendation under such circumstances, a concern further underscored
by our approach under the Conflict of Interest Obligation of requiring
policies and procedures to mitigate or eliminate certain
conflicts.\460\
---------------------------------------------------------------------------

    \459\ See Proposing Release at 21578 (referencing the
Commission's long-held concerns about the incentives that
commission-based compensation provides to churn accounts, recommend
unsuitable securities, and engage in aggressive marketing of
brokerage services); FINRA Report on Conflicts of Interest (Oct.
2013), available at https://www.finra.org/sites/default/files/Industry/p359971.pdf (``FINRA Conflicts Report'') at p. 4.
    \460\ See generally Section II.C.3.
---------------------------------------------------------------------------

    The benefits that accrue to a broker-dealer and its financial
professionals from recommending proprietary products also raise
conflicts of interest that must be disclosed. Material facts relating
to the conflicts of interest associated with recommending proprietary
products could include, as relevant, that the broker-dealer owns the
product, and that in addition to any commission associated with
purchasing the product, the broker-dealer or an affiliate may receive
additional fees and compensation \461\ related to that product.\462\
---------------------------------------------------------------------------

    \461\ For example, a broker-dealer's sale of proprietary
products potentially generates a compensation stream for the broker-
dealer, in addition to commissions, which may need to be disclosed
under paragraph (a)(2)(i)(A).
    \462\ As discussed further in Section II.C.3, in addition to
disclosure of such conflicts, broker-dealers are also required under
the Conflict of Interest Obligation to establish, maintain, and
enforce written policies and procedures reasonably designed to
mitigate or address the conflicts presented.
---------------------------------------------------------------------------

c. Full and Fair Disclosure
    As proposed, the Disclosure Obligation would have required broker-
dealers to ``reasonably disclose'' material facts relating to the scope
and terms of the relationship with the retail customer, including all
material conflicts of interest associated with the recommendation. The
Commission used this formulation in order to give flexibility to
broker-dealers in determining the most appropriate way to meet the
proposed Disclosure Obligation depending on their individual business
practices. The Commission also provided preliminary guidance on what it
believed would be to ``reasonably disclose'' in accordance with the
Disclosure Obligation by setting forth the aspects of effective
disclosure, including the form and manner of disclosure and the timing
and frequency of disclosure.
    In this regard, the Commission requested comment on whether broker-
dealers should be required to ``reasonably disclose'' and whether
additional guidance as to how broker-dealers could meet this standard
should be provided. The Commission also requested comment on whether
disclosure should explicitly be required to be ``full and fair.'' In
response, some commenters raised questions about using the term
``reasonably disclose'' \463\ and whether broker-dealers should be
subject to less rigorous disclosure obligations for recommendations
made to retail customers than investment advisers.\464\ These
commenters recommended that the Commission explicitly require broker-
dealers to provide full and fair disclosure of material facts.\465\ One
commenter reasoned that the Commission should not make Regulation Best
Interest any more stringent than in the Proposing Release, stating that
``full and fair'' is both inapplicable and unnecessary given the
proposed standard under the Disclosure Obligation.\466\
---------------------------------------------------------------------------

    \463\ See, e.g., CFA August 2018 Letter (stating that a
``reasonable'' disclosure standard gives firms too much discretion
to determine how the disclosures will be presented); Galvin (arguing
that the proposed standard would give broker-dealers more
opportunities to argue that they acted ``reasonably'' under the
rules).
    \464\ See, e.g., CFA August 2018 Letter (stating that ``[t]he
Commission offers no explanation for why broker-dealers should be
subject to less rigorous disclosure obligations than investment
advisers'').
    \465\ See, e.g., Pace Investor Rights Clinic August 2018 Letter
(urging the Commission to require broker-dealers to provide full and
fair disclosure of any conflicts that are not eliminated or
mitigated); Better Markets August 2018 Letter (urging the Commission
to further enhance the Disclosure Obligations by requiring broker-
dealers to make full and fair disclosure of all information required
to be disclosed); State Attorneys General Letter; NASAA August 2018
Letter.
    \466\ See SIFMA August 2018 Letter.
---------------------------------------------------------------------------

    After careful consideration of the comments received, the
Commission is adopting the Disclosure Obligation with revisions to
require ``full and fair disclosure'' of all material facts relating to
the scope and terms of the relationship with the retail customer and
all material facts relating to conflicts of interest associated with
the recommendation for the reasons described below.
    While we do not believe that adopting a ``full and fair
disclosure'' standard is significantly different from the proposed
requirement to ``reasonably disclose,'' we believe that the Regulation
Best Interest serves the Commission's goal of facilitating disclosure
to assist retail customers in making informed investment
decisions.\467\ In addition,

Regulation Best Interest will more closely align the Disclosure
Obligation with existing requirements for investment advisers \468\ and
is consistent with disclosure standards in other contexts under the
federal securities laws.\469\
---------------------------------------------------------------------------

    \467\ This approach is consistent with the rationale articulated
in the Fiduciary Interpretation. See Fiduciary Interpretation at
Section II.C (stating, ``In order for disclosure to be full and
fair, it should be sufficiently specific so that a client is able to
understand the material fact or conflict of interest and make an
informed decision whether to provide consent. For example, it would
be inadequate to disclose that the adviser has `other clients'
without describing how the adviser will manage conflicts between
clients if and when they arise, or to disclose that the adviser has
`conflicts' without further description. Similarly, disclosure that
an adviser `may' have a particular conflict, without more, is not
adequate when the conflict actually exists.'' [However,] ``[t]he
word `may' could be appropriately used to disclose to a client a
potential conflict that does not currently exist but might
reasonably present itself in the future.''). See also In the Matter
of The Robare Group, Ltd., et al., Advisers Act Release No. 4566
(Nov. 7, 2016) (Commission Opinion) (finding, among other things,
that adviser's disclosure that it may receive a certain type of
compensation was inadequate because it did not reveal that the
adviser actually had an arrangement pursuant to which it received
fees that presented a potential conflict of interest); aff'd in part
and rev'd in part on other grounds Robare Group, Ltd., et al. v.
SEC, 922 F.3d 468 (D.C. Cir. 2019); SEC v. Blavin, 760 F.2d 706, 711
(6th Cir. 1985) (disclosure that investment adviser ``may'' trade in
recommended securities for its own account was false and misleading
where the adviser actually invested in 10%-25% of the publicly
available stock of the companies it recommended); ICI Letter
(commenting on the Fiduciary Interpretation proposing release).
    \468\ See Fiduciary Interpretation at Section II.A (stating that
``[t]he [investment adviser's] fiduciary duty follows the contours
of the relationship between the adviser and its client, and the
adviser and its client may shape that relationship by agreement
provided that there is full and fair disclosure and informed
consent'' (emphasis added)).
    \469\ For instance, the Municipal Securities Rulemaking Board
requires that municipal advisors provide full and fair disclosure of
material conflicts of interest and material legal or disciplinary
events. See MSRB Rule G-42. In addition, the registration and
disclosure requirements of the Securities Act of 1933 (``Securities
Act'') are based on the concept that investors in a public offering
should be provided with full and fair disclosure of material
information needed for an informed investment decision. See
Securities Act Concepts and Their Effects on Capital Formation,
Securities Act Release No. 7314 (Jul. 25, 1996); 61 FR 40044 (Jul.
31, 1996) at text accompanying footnote 13; see also SEC v. Ralston
Purina Co., 346 U.S. 119, 124 (1953). Finally, Regulation FD under
the Securities Act was ``designed [in part] to promote the full and
fair disclosure of information by issuers.'' See Selective
Disclosure and Insider Trading, Securities Act Release No. 7881
(Aug. 15, 2000), 65 FR 51715 (Aug. 24, 2000).
---------------------------------------------------------------------------

    The full and fair disclosure standard that the Commission is
adopting for broker-dealers under the Disclosure Obligation is
generally similar to the disclosure standard applicable to investment
advisers under the Advisers Act.\470\ Similar to the Proposing
Release's interpretation of the phrase ``reasonably disclose,'' broker-
dealers' obligation to provide full and fair disclosure should give
sufficient information to enable a retail investor to make an informed
decision with regard to the recommendation.\471\
---------------------------------------------------------------------------

    \470\ See supra footnote 468. See also Fiduciary Interpretation,
stating that the disclosure ``should be sufficiently specific so
that a client is able to understand the material fact or conflict of
interest and make an informed decision whether to provide consent.''
    \471\ See Proposing Release at 21604, footnote 208.
---------------------------------------------------------------------------

    We disagree with commenters who believe the ``full and fair''
standard is too stringent. While the general standard for broker-
dealers under the Disclosure Obligation will be generally similar to
the disclosure requirements applicable to investment advisers, the
scope of the required disclosure is not as broad. For example, the
Disclosure Obligation only requires disclosure of material facts
relating to the scope and terms of the relationship with the broker-
dealer, and material facts relating to conflicts of interest associated
with a broker-dealer's recommendations, and not of all material facts
relating to the relationship. In addition, the Disclosure Obligation
only applies to retail customers. In contrast, the disclosure
requirements imposed by the fiduciary duty under the Advisers Act
generally and Form ADV in particular are broader (e.g., Form ADV
requires disclosure of the adviser's principal owner(s) and certain
financial industry activities and affiliations, which are not
explicitly required under the Disclosure Obligation; Form ADV and the
fiduciary duty also go to disclosure of the entire relationship while
the Disclosure Obligation is tailored to the recommendation and also
given at relevant points in time). We designed our approach to avoid
having retail customers receive overwhelming amounts of
information.\472\
---------------------------------------------------------------------------

    \472\ Commenters pointed out that requiring too much information
regarding conflicts of interest would go beyond the standard of
materiality set forth under Basic. See, e.g., SIFMA August 2018
Letter; Cetera August 2018 Letter (citing Basic at 231, noting that
``an avalanche of trivial information'' would not be ``conducive to
informed decision making.''). See also Letter from David Schwartz,
President and CEA, Florida International Bankers Association
(``FIBA'') (Feb. 8, 2019) FIBA (``February 2019 Letter'') (stating
that ``the amount of required disclosure may overwhelm rather than
educate'').
---------------------------------------------------------------------------

    Some commenters suggested that disclosure and informed consent
should be required in order to comply with the obligations under
Regulation Best Interest, similar to the approach taken under the
fiduciary duty under the Advisers Act.\473\ We have carefully
considered these comments. As noted above, under the Disclosure
Obligation, broker-dealers are required to provide full and fair
disclosure such that a retail customer can make an informed decision
with regard to the recommendation (i.e., whether to accept (or reject)
that recommendation). In making such an informed decision after being
provided with full and fair disclosure, we believe that the retail
customer has provided ``informed consent'' in a manner that is
analogous to the informed consent required to be provided by a client
in the context of an investment adviser-client relationship.\474\ An
investment advisory client must provide informed consent to the
adviser's conflicts of interest in the context of the entire
relationship, which can be broader than the informed consent provided
by a retail customer when making an informed decision to accept or
reject a particular recommendation by a broker-dealer. We believe this
is appropriate because the investment-adviser client relationship is
generally broader and can include, for example, unlimited investment
discretion by the investment adviser to conduct securities transactions
on behalf of the client. The broker-dealer customer relationship on the
other hand is generally transaction-based and the retail customer must
accept (or reject) each recommendation by a broker-dealer after the
broker-dealer has provided full and fair disclosure as required under
the Disclosure Obligation. Thus, in this regard, Regulation Best
Interest will more closely align the Disclosure Obligation with the
existing requirements for investment advisers, as noted above, but is
tailored to the broker-dealer relationship.\475\ The Commission
believes that the final Disclosure Obligation along with the
protections provided by the requirements of Regulation Best Interest,
including the Care Obligation and Conflict of Interest Obligation, will
further serve to enhance the protections available to retail customers.
---------------------------------------------------------------------------

    \473\ See, e.g., ASA Letter (stating that the Commission should
reaffirm that broker-dealers can address conflicts of interest by
disclosing them and obtaining informed consent); Primerica Letter
(suggesting that the Commission clarify that broker-dealers can
effectively address all material conflicts by providing full and
fair disclosure and obtaining customer consent); Morgan Stanley
Letter.
    \474\ As discussed in the Fiduciary Interpretation, a client's
informed consent can be either explicit or, depending on the facts
and circumstances, implicit. See Fiduciary Interpretation at Section
II.C. Under Regulation Best Interest, however, assuming the retail
customer has been provided with full and fair disclosure, the retail
customer will be considered to have provided informed consent by
affirmatively accepting a recommendation.
    \475\ See Fiduciary Interpretation (describing an investment
adviser's obligation to provide disclosure designed to put a
reasonable client in a position to be able to understand and provide
informed consent).
---------------------------------------------------------------------------

    One commenter recommended that the Commission clarify what a
broker-dealer is required to deliver to a retail customer in order to
permit the retail customer to make an ``informed decision,'' and asked
the Commission to confirm that it does not require a case-by-case
analysis of what is reasonable to permit the retail customer to make an
informed decision.\476\ In addition, other commenters underscored the
importance of providing retail customers with sufficient time to review
and comprehend the disclosed information prior to making an informed
decision about a recommendation.\477\ Other commenters

questioned whether providing ``sufficient information'' to enable a
retail customer to make an informed decision broadens the Disclosure
Obligation beyond ``material facts'' and ``material conflicts.'' \478\
---------------------------------------------------------------------------

    \476\ See, e.g., CCMC Letters.
    \477\ See, e.g., Financial Planning Coalition Letter (stating
that disclosures should be made prior to the recommendation so a
retail customer has sufficient time to review and understand them,
as well as to ask questions); CFA August 2018 Letter (stating that
if the Commission wants to give investors time to consider the
information and make an informed choice disclosure should be
provided as soon as reasonably feasible and, when possible, no later
than the point of recommendation).
    \478\ See, e.g., IPA Letter (requesting clarification on whether
providing sufficient information to enable a retail investor to make
an informed decision broadens the disclosure obligation beyond
material facts); CCMC Letters.
---------------------------------------------------------------------------

    We have considered the issues raised by the commenters and in the
sections that follow are providing guidance on what we believe
constitutes ``full and fair disclosure'' for purposes of the Disclosure
Obligation, including the form and manner, and the timing and
frequency, of the disclosure. Similar to the proposal, in lieu of
setting explicit requirements by rule for what constitutes full and
fair disclosure of all material facts, we are providing broker-dealers
flexibility in determining the most appropriate way to meet the
Disclosure Obligation depending on each broker-dealer's specific
business practices.
    As we noted in the Proposing Release, while we are providing
flexibility to broker-dealers to meet the Disclosure Obligation, we
continue to be sensitive to the potential that broker-dealers could opt
to disclose all facts, including those that do not meet the materiality
threshold.\479\ We are cognizant of the likelihood that some broker-
dealers could provide lengthy disclosures that do not meaningfully
convey the material facts regarding the scope and terms of the
relationship and material facts regarding conflicts of interest, an
outcome that could undermine the Commission's goal of facilitating
disclosure to assist retail customers in making an informed investment
decision. To this end, broker-dealers will only be required to disclose
material facts about the scope and terms of the relationship or
conflicts of interest.
---------------------------------------------------------------------------

    \479\ Id.
---------------------------------------------------------------------------

    Although we are adopting the requirement with revisions to require
full and fair disclosure of all material facts, we still believe it is
important to clarify that broker-dealers' compliance with the
Disclosure Obligation will be measured against a negligence standard,
not against a standard of strict liability, consistent with the
Proposing Release. The Commission has taken this position in other
contexts where full and fair disclosure is required, including under
the fiduciary duty under the Advisers Act.\480\
---------------------------------------------------------------------------

    \480\ While establishing scienter is a requirement to establish
violations of Section 206(1) of the Advisers Act, it is not required
to establish a violation of Section 206(2); a showing of negligence
is adequate. See SEC v. Capital Gains Research Bureau, Inc., 375
U.S. 180, 195 (1963); see also SEC v. Steadman, 967 F.2d at 643 and
footnote 5; Steadman v. SEC, 603 F.2d 1126, 1132-34 (5th Cir. 1979),
aff'd on other grounds, 450 U.S. 91 (1981). See also Prohibition of
Fraud by Advisers to Certain Pooled Investment Vehicles, Advisers
Act Release No. 2628 (Aug. 3, 2007). In its adoption of Rule 206(4)-
8 under the Advisers Act, the Commission stated that it would not
need to demonstrate that an adviser violating the rule acted with
scienter.
---------------------------------------------------------------------------

Form and Manner
    In the Proposing Release, the Commission noted that it was not
proposing to specify by rule the form (e.g., narrative v. graphical/
tabular) or manner (e.g., relationship guide or other written
communications) of disclosure required under the Disclosure Obligation.
The Commission stated that disclosure should be concise, clear and
understandable to promote effective communication between a broker-
dealer and a retail customer.\481\ We also stated that broker-dealers
would be able to deliver disclosure required pursuant to Regulation
Best Interest consistent with the Commission's guidance regarding
electronic delivery of documents.\482\ Although we preliminarily
believed that broker-dealers should have the flexibility to make
disclosures by any means, as opposed to requiring a standard written
document at the outset of the relationship, we stated our belief that
any such disclosure should be provided in writing.\483\
---------------------------------------------------------------------------

    \481\ See Proposing Release at 21604, footnote 211.
    \482\ Id. at 21604 and footnote 214.
    \483\ Id. at 21604 and footnote 213.
---------------------------------------------------------------------------

    Commenters sought further guidance in a number of areas relating to
disclosure, including the extent to which the Relationship Summary or
other disclosures may satisfy the Disclosure Obligation,\484\ the
circumstances under which standardized disclosure could be sufficient,
as well as how, and the extent to which, disclosures made pursuant to
the Disclosure Obligation should be made in writing.\485\ In response
to comments we are providing additional guidance. We are also
reaffirming guidance that we provided in the Proposing Release.
---------------------------------------------------------------------------

    \484\ See, e.g., Cambridge Letter (arguing that the Relationship
Summary and Disclosure Obligation are duplicative requirements);
CUNA Mutual Letter (seeking greater clarification regarding the
extent to which information provided in other documents could
satisfy the Disclosure Obligation); Financial Services Institute
August 2018 Letter (arguing that providing the Relationship Summary
should be deemed to satisfy the requirements of the broker-dealer's
Disclosure Obligation); Morningstar Letter (arguing that due to the
brevity of the Relationship Summary, additional broker-dealer
disclosures would be necessary); Wells Fargo Letter (recommending
that the requirements of the Disclosure Obligation be incorporated
into Form CRS).
    \485\ See, e.g., Schwab Letter (arguing that because most
recommendations occur over the phone and through various digital
means, the Commission should remove the ``in writing'' requirement
and allow firms to determine the best method for disclosure
depending on the situation); SIFMA August 2018 Letter (seeking
clarification that oral disclosure at the time of the recommendation
may be sufficient to satisfy the Disclosure Obligation in certain
circumstances). But see AARP August 2018 Letter (stating that oral
disclosures should never be permitted).
---------------------------------------------------------------------------

Prescribed Form of Disclosure
    As noted in the Proposing Release, we believe it is important to
provide broker-dealers with flexibility in determining the most
appropriate and effective way to meet the Disclosure Obligation to
reflect the structure and characteristics of their relationships with
retail customers.\486\ Many commenters agreed with this reasoning,
arguing that there was a need to preserve flexibility for broker-
dealers to comply with the Disclosure Obligation as proposed.\487\
Other commenters believed, however, that the proposed Disclosure
Obligation gave broker-dealers too much discretion.\488\
---------------------------------------------------------------------------

    \486\ See Proposing Release at 21604.
    \487\ See, e.g., Prudential Letter; SIFMA August 2018 Letter;
TIAA Letter; UBS Letter.
    \488\ See, e.g., Better Markets August 2018 Letter (arguing that
proving broker-dealer discretion in this area will virtually assure
a failure to communicate helpfully with investors); CFA August 2018
Letter (arguing that the flexibility the Commission provides will
result in disclosure that does not effectively convey key
information). See also Morningstar Letter (supporting the expansion
of disclosures, but arguing that ``publicly available disclosures
with a standard taxonomy work best because they empower third
parties such as ``fintech'' and ``reg-tech'' firms to analyze and
contextualize critical information and amplify a call to action for
ordinary investors'').
---------------------------------------------------------------------------

    After careful consideration of these comments, the Commission has
decided not to require any standard written disclosures (other than the
Relationship Summary) at this time. Although we recognize the potential
value to retail customers of standardizing the disclosures required
pursuant to the Disclosure Obligation, we believe that retail customers
can derive value from disclosures that accommodate the structure and
characteristics of the particular broker-dealer. On balance, we
recognize the wide variety of business models and practices and we
continue to believe it is important to provide broker-dealers with
flexibility to enable them to better tailor disclosure and information
that their retail customers can understand and may be more likely to
read at relevant points in time, rather

than, for example, mandating a standardized all-inclusive (and likely
lengthy) disclosure.\489\
---------------------------------------------------------------------------

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

    We disagree that flexibility will prevent investors from obtaining
information necessary to make an informed investment decision and do
not believe that requiring a standard written disclosure beyond the
Relationship Summary is necessary at this time. We emphasize, however,
that the adequacy of the disclosure will depend on the facts and
circumstances. We intend to evaluate broker-dealer disclosure practices
in response to Regulation Best Interest over time to determine whether
additional disclosure initiatives may be appropriate.
Relying on Other Disclosures and Standardized Documents
    In the Proposing Release, we described how the Disclosure
Obligation builds upon the requirements of Form CRS and the disclosures
in the Relationship Summary.\490\ We also stated that we anticipated
that broker-dealers may elect to use other documents to satisfy
elements of the Disclosure Obligation, such as an account agreement, a
relationship guide, or a fee schedule.\491\
---------------------------------------------------------------------------

    \490\ See Proposing Release at 21600.
    \491\ See id. at 21605.
---------------------------------------------------------------------------

    Several commenters requested guidance on their ability to use other
documents to meet the requirements of the Disclosure Obligation. For
example, some commenters recommended that the Commission harmonize the
Disclosure Obligation with the broad, firm-level disclosure obligations
of Form CRS so that firms can use the Relationship Summary to help
satisfy the Disclosure Obligation.\492\ Commenters also recommended
that broker-dealers should be permitted to satisfy the Disclosure
Obligation by using standardized language generally to describe the
broker-dealer's products and services available to their retail
customers and related conflicts of interest, including the ranges of
remuneration payable to a broker-dealer in connection with its
recommendation of different products.\493\ Several commenters also
suggested that the Commission should clarify that the Disclosure
Obligation should not apply where an existing disclosure regime already
exists.\494\ Similarly, other commenters recommended that the
Commission clarify whether broker-dealers could meet the Disclosure
Obligation by referencing information required to be disclosed pursuant
to other regulatory requirements such as FINRA disclosure rules.\495\
---------------------------------------------------------------------------

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

    After careful consideration of the comments, the Commission is
providing guidance to permit a broker-dealer to utilize existing
disclosures and standardized documents, such as a product prospectus,
relationship guide, account agreement, or fee schedule to help satisfy
the Disclosure Obligation. The Commission recognizes that broker-
dealers are subject to disclosure requirements other than the
Disclosure Obligation and Form CRS, and believes utilizing such
existing disclosures where appropriate is a reasonable and cost-
effective way to satisfy the requirements of the Disclosure Obligation,
and can also help avoid duplicative or voluminous disclosure by not
requiring the creation of new disclosure documents.\496\ We recognize
also that in many instances, information necessary to satisfy the
Disclosure Obligation may be broadly applicable to a broker-dealer's
retail customers, and therefore the use of standardized disclosure may
be appropriate.
---------------------------------------------------------------------------

    \496\ See Proposing Release at 21599, footnotes 175 and 176. For
example, broker-dealers must disclose information about a
transaction on trade confirmations pursuant to Exchange Act Rule
10b-10. 17 CFR 240.10b-10. See also Morgan Stanley Letter (noting
that the securities laws and FINRA rules already require firms to
provide significant disclosures to clients at natural touchpoints in
the client relationship).
---------------------------------------------------------------------------

    However, while broker-dealers may choose to standardize certain
forms of their disclosure, whether such materials would be sufficient
to satisfy the Disclosure Obligation will depend on the facts and
circumstances.\497\ For example, disclosures may need to be tailored to
a particular recommendation if the standardized disclosure does not
sufficiently identify the material facts about a conflict of interest
presented by a particular recommendation. Accordingly, a broker-dealer
remains responsible for disclosing all material facts relating to the
scope and terms of the relationship with the retail customer (as
discussed above), as well as all material facts relating to conflicts
of interest that are associated with a recommendation whether or not
the firm relies on other materials to fulfill that obligation.
---------------------------------------------------------------------------

    \497\ Similarly, we also note that a number of broker-dealers
are modeling their disclosure of fees other than transaction-based
fees on the NASAA Schedule of Miscellaneous Account and Service
Fees. See NASAA August 2018 Letter. A broker-dealer may use this
schedule to comply in part with its obligation to disclose fees and
costs pursuant to the Disclosure Obligation. We note, however, that
the NASAA Schedule may recommend the disclosure of certain fees that
may not be required under the Disclosure Obligation depending on the
facts and circumstances, for example those that are not ``material
facts'' for purposes of Regulation Best Interest.
---------------------------------------------------------------------------

    With regard to commenters' request that the Relationship Summary be
considered sufficient to satisfy the Disclosure Obligation, we note
that the Relationship Summary will provide succinct information and is
designed to assist retail investors with the process of deciding
whether to engage, or to continue to engage, a particular firm or
financial professional, deciding whether to establish or continue to
maintain a brokerage or investment advisory relationship, and asking
questions and easily finding additional information.

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

    \498\ See Proposing Release at 21604.
    \499\ Id.
    \500\ Id.
---------------------------------------------------------------------------

    A number of commenters supported the ``in writing''
requirement.\501\ Other commenters, however, recommend that the
Commission also permit the use of oral disclosure.\502\ For example,
several commenters recommend that the Commission permit broker-dealers
to orally disclose information to their customers provided they later
follow-up in writing.\503\ Other commenters highlighted concerns
associated with such oral disclosure.\504\
---------------------------------------------------------------------------

    \501\ See, e.g., Vanguard Letter (recommending that the
Commission require a consolidated written disclosure of all material
conflicts); CFA August 2018 Letter.
    \502\ See Schwab Letter (recommending that the Commission
eliminate the ``in writing'' requirement and allow firms to design
and document the best method depending on the situation); SIFMA
August 2018 Letter; TIAA Letter. But see AARP August 2018 Letter
(stating that oral disclosures should never be permitted).
    \503\ See PIABA Letter (recommending that the Commission allow
broker-dealers to discharge their disclosure obligations by: (i)
Orally explaining the relationship, any conflicts, how the broker-
dealer is paid, and the features, benefits and risks of the
recommendation; and (ii) confirming the discussion by letter or
email, which is signed or confirmed as being accurate by the
customer, and retained in customer's file); SIFMA August 2018 Letter
(recommending that the Commission clarify that oral disclosure at
the time of the recommendation may satisfy the Disclosure Obligation
if: (1) The associated person documents that the oral disclosure was
made, or (2) the firm provides written disclosure after the trade);
USAA Letter (suggesting that the Commission could allow oral
product-level disclosures, while providing the client the choice to
request confirming disclosure in writing at her option).
    \504\ See Edward Jones Letter (expressing concern that the
Commission is implying that a dual-registrant would need to provide
an oral point of sale disclosure regarding the capacity in which it
is acting when it makes a recommendation, and that such oral
disclosure would be difficult to supervise and of little value);
CCMC Letters (stating that a dual-registrant should not have to make
an oral disclosure of the capacity for each and every conversation
it has with retail customers).
---------------------------------------------------------------------------

    After carefully considering the comments, we are adopting the ``in
writing'' requirement as proposed, subject to discussion in Section
II.C.1, Oral Disclosure or Disclosure After a Recommendation. As stated
above, we believe that retail customers would benefit from receiving a
written disclosure to assist their investment decisions and form the
basis of an informed investment decision.\505\ However, we also believe
that broker-dealers require flexibility to make proper written
disclosures to their customers. Accordingly, the Commission is not
requiring a specific form or method of written disclosure.
---------------------------------------------------------------------------

    \505\ One commenter stated that certain foreign laws do not
permit firms to provide their customers with written materials prior
to entering into a contractual relationship. See FIBA February 2019
Letter. In response, we note that the Disclosure Obligation requires
disclosure to be provided prior to or at the time of the
recommendation and is not tied to a contractual relationship. In
addition, the staff will continue to evaluate the application of the
Disclosure Obligation in circumstances such as the one raised by
this commenter. Interested parties are invited to provide further
feedback on issues involving non-U.S.- resident retail customers.
---------------------------------------------------------------------------

    Although we are requiring that disclosure be made ``in writing,''
we recognize that a broker-dealer may need to supplement, clarify or
update written disclosure it has previously made before it provides a
retail customer with a recommendation. For instance, as we stated in
the Proposing Release, we recognized that broker-dealers may provide
recommendations by telephone and offer clarifying disclosure orally in
some instances subject to certain conditions,\506\ such as a dual-
registrant informing a retail customer of the capacity in which the
dual-registrant is acting in conjunction with a recommendation.\507\ In
such instances, we believe that it may be necessary as a practical
matter to provide oral disclosure of a material fact to supplement,
clarify, or update written disclosure made previously.\508\ Therefore,
firms may make oral disclosures under the circumstances outlined in
Section II.C.1, Oral Disclosure or Disclosure After a
Recommendation.\509\
---------------------------------------------------------------------------

    \506\ See Proposing Release at 21604, footnote 213.
    \507\ See id. at 21605, footnote 216. We stated that a broker-
dealer could orally clarify the capacity in which it is acting at
the time of the recommendation if it had previously provided written
disclosure to the retail customer beforehand disclosing its capacity
as well as the method it planned to use to clarify its capacity at
the time of the recommendation.
    \508\ For more discussion on guidance relating to updating
disclosures, see Section II.C.1.d, Disclosure Obligation, Updating
Disclosure.
    \509\ See Section II.C.1, Disclosure Obligation, Oral Disclosure
or Disclosure After a Recommendation.
---------------------------------------------------------------------------

    When making such an oral disclosure, firms must maintain a record
of the fact that oral disclosure was provided to the retail
customer.\510\ We are not explicitly requiring broker-dealers to create
a record documenting the substance of the oral disclosure itself, but
rather a record of the fact that such oral disclosure was made.\511\
This record should include documentation sufficient to demonstrate that
disclosure was made to the retail customer, which could include, for
example, recordings of telephone conversations or contemporaneous
written notations. Nonetheless, although it is not required by
Regulation Best Interest, as a best practice we encourage broker-
dealers that make oral disclosures to subsequently provide to their
retail customers in a timely manner written disclosure summarizing the
information conveyed orally.
---------------------------------------------------------------------------

    \510\ See Section II.D.
    \511\ See Section II.C.1, Disclosure Obligation, Oral Disclosure
or Disclosure After a Recommendation.
---------------------------------------------------------------------------

Plain English
    In the Proposing Release, we stated that broker-dealers should
apply plain English principles to written disclosures including, among
other things, the use of short sentences and active voice, and
avoidance of legal jargon, highly technical business terms, or multiple
negatives.\512\ Similarly, several commenters recommended that whatever
format broker-dealers use for their disclosure, they should be written
in plain English and easy to understand.\513\ Accordingly, although it

is not required, the Commission encourages broker-dealers to use plain
English in preparing any disclosures they make in satisfaction of the
Disclosure Obligation.
---------------------------------------------------------------------------

    \512\ Proposing Release at 21604, footnote 213.
    \513\ See State Attorneys General Letter (stating that all
disclosures must be in plain language and easily understood by
investors); CFA Institute (recommending that the Commission require
a clear English listing of all conflicts of interest in which a
broker-dealer engages). One commenter requested that the Commission
consider clarifying that the Plain English standard in the
Disclosure Obligation is not an English-only requirement to address
the needs of certain non-U.S. customers. See FIBA February 2019
Letter. In response, we note that any disclosure should be made
consistent with Plain English principles.
---------------------------------------------------------------------------

Electronic Delivery
    In the Proposing Release, we took the position that broker-dealers
could deliver written disclosures required by Regulation Best Interest
in accordance with the Commission's existing guidance regarding
electronic delivery of documents.\514\ This framework consists of the
following elements: (1) Notice to the investor that information is
available electronically; (2) 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 (3) 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).\515\ We
have furthermore clarified that one method to satisfy the evidence of
delivery element is to obtain informed consent from investors.\516\
---------------------------------------------------------------------------

    \514\ See Proposing Release at 21604. We cited to a number of
prior Commission releases on electronic delivery in the Proposing
Release, including Use of Electronic Media by Broker-Dealers,
Transfer Agents, and Investment Advisers for Delivery of
Information, Exchange Act Release No. 37182 (May 9, 1996), 61 FR
24644 (May 15, 1996) (``1996 Release'') (providing Commission views
on electronic delivery of required information by broker-dealers,
transfer agents and investment advisers) and Use of Electronic
Media, Exchange Act Release No. 42728 (Apr. 28, 2000), 65 FR 25843
(May 4, 2000) (``2000 Release'') (providing updated interpretive
guidance on the use of electronic media to deliver documents on
matters such as telephonic and global consent; issuer liability for
website content; and legal principles that should be considered in
conducting online offerings).
    \515\ See 1996 Release at 24646-47; see also Relationship
Summary Proposing Release at 21454.
    \516\ See 2000 Release at 25845-46 (clarifying how market
intermediaries and other market participants can obtain consent for
electronic delivery).
---------------------------------------------------------------------------

    Several commenters agreed with this approach.\517\ These commenters
typically supported the use of electronic disclosure and recommended
various methods (e.g., hyperlinks to web-based documents) but
recommended paper delivery as the default option.\518\ Other commenters
recommended permitting electronic delivery for required
disclosures.\519\ While investor testing on the proposed Relationship
Summary indicated that some retail investors generally support some
form of electronic copies, most participants in the study ``generally
liked having a paper version of the Relationship Summary.'' \520\
Similarly, as stated in the Form CRS adopting release, the IAC has
cited one study indicating 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 accessing them online (6%).\521\
---------------------------------------------------------------------------

    \517\ See, e.g., CFA August 2018 Letter (stating that giving
firms discretion to choose the delivery mechanism would all but
ensure that many investors would never see the disclosures); AARP
August 2018 Letter (recommending that the Commission prohibit firms
from solely providing electronic access to disclosures and require
delivery of paper copies).
    \518\ Id. See also LPL August 2018 Letter (noting that modern
communication practices underscore the need for the Commission to
provide more flexibility to broker-dealers to satisfy their document
delivery obligations; and requesting that the Commission confirm
that broker-dealers can deliver disclosures in compliance with
existing guidance regarding electronic delivery of documents (which
requires paper delivery as a default)).
    \519\ See, e.g., IPA Letter (urging the Commission to confirm
that all required disclosures may be delivered electronically); see
also AXA Letter (urging the Commission to encourage the use of
appropriate electronic disclosures, which can make information
available to consumers more quickly and in a more digestible
format); Prudential Letter (recommending that electronic delivery be
deemed to comply with the Disclosure Obligation).
    \520\ See RAND 2018.
    \521\ Relationship Summary Adopting Release at Section II.D.3.a
(citing Investor Advisory Committee, Recommendation of the Investor
as Purchaser Subcommittee: Promotion of Electronic Delivery and
Development of a Summary Disclosure Document for Delivery of
Investment Company Shareholder Reports (Dec. 7, 2017), available at
https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-promotion-of-electronic-delivery-and-development.pdf
(citing FINRA Investor Education Foundation, ``Investors in the
United States 2016,'' December 2016, available at http://bit.ly/2hMrppX).
---------------------------------------------------------------------------

    After considering investor testing results and commenters' concerns
and recommendations, the Commission reaffirms the application of
existing Commission guidance relating to paper and electronic delivery
of disclosure documents to broker-dealers in meeting the Disclosure
Obligation. Specifically, we believe that broker-dealers should be able
to satisfy the Disclosure Obligation by using electronic delivery.\522\
However, if a broker-dealer is providing its customers with electronic
delivery (upon their consent) it cannot solely offer electronic
delivery and must make paper delivery available, upon request. Both
Regulation Best Interest and Form CRS require firms to provide
electronic delivery of documents within the framework of the
Commission's existing guidance regarding electronic delivery.\523\
---------------------------------------------------------------------------

    \522\ See 1996 Release (stating that ``the Commission believes
that broker-dealers . . . similarly should have reason to believe
that electronically delivered information will result in the
satisfaction of the delivery requirements under the federal
securities laws. Thus, whether using paper or electronic media,
broker-dealers . . . should consider the need to establish
procedures to ensure that applicable delivery obligations are
met''); see also 2000 Release.
    \523\ See Relationship Summary Adopting Release, Section II.C.3.
---------------------------------------------------------------------------

d. Timing and Frequency
    We proposed requiring broker-dealers to provide the disclosures
required by the Disclosure Obligation ``prior to or at the time of''
the recommendation. We noted the importance of determining the
appropriate timing and frequency of disclosure that may be effectively
provided ``prior to or at the time of'' the recommendation.\524\ In
cases where a broker-dealer determines that disclosure may be more
effectively be provided in an initial, more general disclosure (such as
a relationship guide) followed by specific information in a subsequent
disclosure that is provided at a later time, the initial disclosure
would address when and how a broker-dealer would provide more specific
information regarding the material fact or conflict in a subsequent
disclosure. We stated also that in circumstances where a broker-dealer
determines to provide an initial, more general disclosure (such as a
relationship guide) followed by specific information in a subsequent
disclosure that is provided after the recommendation (such as a trade
confirmation), the initial disclosure must address when and how a
broker-dealer would provide more specific information regarding the
material fact or conflict in a subsequent disclosure (e.g., after the
trade in the trade confirmation).\525\ We also stated

that disclosure after the recommendation, such as in a trade
confirmation for a particular recommended transaction would not, by
itself, satisfy the Disclosure Obligation, because the disclosure would
not be ``prior to, or at the time of the recommendation.'' We noted
also that whether there is sufficient disclosure in both the initial
disclosure and any subsequent disclosure would depend on the facts and
circumstances.\526\
---------------------------------------------------------------------------

    \524\ See Proposing Release at 21605.
    \525\ The Commission has granted exemptions to certain dual-
registrants, subject to a number of conditions, from the written
disclosure and consent requirements of Advisers Act Section 206(3)
(which makes it unlawful for an adviser to engage in a principal
trade with an advisory client, unless it discloses to the client in
writing before completion of the transaction the capacity in which
the adviser is acting and obtains the consent of the client to the
transaction). The exemptions are subject to several conditions,
including conditions to provide disclosures at multiple points in
the relationship, including disclosure that the entity may be acting
in a principal capacity in a written confirmation at or before
completion of a transaction. See, e.g., In the matter of Merrill
Lynch Pierce Fenner & Smith, Incorporated, Investment Advisers Act
Release No. 4595; (Dec. 28, 2016); In the matter of Robert W. Baird
& Co., Incorporated, Advisers Act Release No. 4596 (Dec. 28, 2016);
In the matter of UBS Financial Services, Inc., Advisers Act Release
No. 4597 (Dec. 28, 2016); In the matter of Wells Fargo Advisors,
LLC, Wells Fargo Advisors Financial Network, LLC, Advisers Act
Release No. 4598 (Dec. 28, 2016).
    \526\ See Proposing Release at 21605.
---------------------------------------------------------------------------

    Several commenters supported the Commission's proposal to require
broker-dealers to make disclosure prior to or at the time of the
recommendation, but disagreed about the precise timing with which
disclosure should be provided.\527\ For example, some commenters
recommended that the Commission require or allow broker-dealers to meet
the Disclosure Obligation prior to or at account opening.\528\
Similarly, several commenters recommended that the Commission require
broker-dealers to provide disclosure prior to a recommendation or
investment decision.\529\ Specifically, commenters recommended that the
Commission require disclosures to be made with enough time prior to a
recommendation that a retail customer has sufficient time to review and
understand them, as well as ask questions.\530\
---------------------------------------------------------------------------

    \527\ See, e.g., CFA August 2018 Letter (stating that any
information that can be provided before the transaction is entered
into should be provided to give investor time to consider it); AARP
August 2018 Letter (stating that all key disclosures should be made
significantly in advance of an investment decision; disclosure made
at the time of or immediately prior to investing is not adequate);
Bank of America Letter (stating that disclosure of material
conflicts of interest can be satisfied in advance of a particular
recommendation on a one-time basis); Pacific Life August 2018 Letter
(stating that disclosure of material conflicts of interest must be
disclosed at or prior to the point of sale or at the time the
recommendation is made); FPC Letter.
    \528\ See, e.g., TIAA Letter (recommending that the Commission
require firms to meet their Regulation Best Interest and CRS
disclosure obligations at or before the point the investor: (i)
Opens a brokerage account; or (ii) engages the broker-dealer to
provide advice services (including for recommendations provided by
phone)).
    \529\ See, e.g., Better Markets August 2018 Letter (stating that
disclosure should be provided in a timely fashion so investors have
a meaningful opportunity to read, digest, understand, and discuss
them); FPC Letter; AARP August 2018 Letter.
    \530\ See, e.g., NAIFA Letter (recommending that disclosure be
provided at or before the time of a recommendation because it helps
consumers better understand and evaluate the recommendations they
receive and preserves flexibility for professionals who may be
interacting with clients of various levels of financial
sophistication, duration of relationship, and investment history);
CFA August 2018 Letter (recommending that transaction-specific
information should be provided, whenever possible, at the point of
recommendation rather than at the point of sale); Groom Letter
(recommending that the Commission require disclosure of material
conflicts of interest related to investing plan distribution
proceeds at the inception of any discussions of the matter); PIABA
Letter (recommending that the Commission require firms to provide
specific charges prior to or at the time the recommendation is
made); FPC Letter (stating that disclosures should be made prior to
the recommendation so the retail customer has sufficient time to
review and understand them, as well as to ask questions); Better
Markets August 2018 Letter; AARP August 2018 Letter; Bank of America
Letter.
---------------------------------------------------------------------------

    Several other commenters, however, recommended that the Commission
clarify whether broker-dealers could meet the Disclosure Obligation at
the point of sale \531\ or after a recommendation is made.\532\
Conversely, several commenters recommended that the Commission clarify
that it will not require point of sale or point of recommendation
disclosure obligations.\533\
---------------------------------------------------------------------------

    \531\ See Pacific Life August 2018 Letter (stating that material
conflicts of interest must be disclosed at or prior to the point-of-
sale or at the time the recommendation is made).
    \532\ See, e.g., LPL August 2018 Letter (suggesting that the
Commission permit a broker-dealer to satisfy the Disclosure
Obligation by directing an investor in writing to review the
recommended product's offering documents, along with hyperlinks to
those documents, prior to the recommendation or shortly thereafter
via a trade confirmation); SIFMA August 2018 Letter (recommending
that the Commission confirm that firms would be permitted to provide
disclosures on a website or on a post-trade basis, provided
customers have been informed in advance of the timing of those
disclosures).
    \533\ See, e.g., SIFMA August 2018 Letter (requesting the
Commission clarify that there is no requirement for a point of sale
or point of recommendation disclosure, as such a requirement would
be unworkable for the industry); Morgan Stanley Letter (noting that
point-of-sale disclosures pose operational issues and may not afford
clients sufficient time to adequately consider and understand them);
HD Vest Letter (recommending that the Commission not mandate written
point of recommendation or point of sale disclosure); Prudential
Letter (requesting that the Commission clarify that it is not
mandating a point of sale or point of recommendation disclosure
obligation). But see NASAA August 2018 Letter (stating that only a
transaction-by-transaction disclosure obligation will ensure that
broker-dealers are meeting their ``best interest'' duties and
provide investors the level of protection they deserve); AARP August
2018 Letter (recommending that the Commission require firms to
disclose their fees any time a recommendation is made).
---------------------------------------------------------------------------

    After carefully considering the comments received, we are providing
our view on what it means for broker-dealers to provide the required
disclosures in writing ``prior to or at the time of'' the
recommendation. As with the ``form and manner'' of making disclosures,
the Commission continues to believe that broker-dealers should have
flexibility with respect to the ``timing and frequency'' of providing
disclosure to determine the most appropriate and effective way to meet
the Disclosure Obligation. Accordingly, the Commission has decided not
to provide any prescriptive requirements for the timing and frequency
of written disclosures, other than requiring disclosure prior to or at
the time of the recommendation.
    In order to make an informed decision about a securities
recommendation, retail customers must have appropriate information at
the time or before a recommendation is made. Being in possession of
relevant information gives investors the tools with which to judge the
merits of acting on a particular recommendation. As stated in the
Proposing Release, the Commission believes that broker-dealers should
provide retail customers information early enough in the process to
give them adequate time to consider the information and promote the
investor's understanding in order to make informed investment
decisions.\534\ Similarly, the Commission believes that broker-dealers
should not provide information so early that the disclosure fails to
provide meaningful information (e.g., does not sufficiently identify
material conflicts presented by a particular recommendation, or
overwhelms the retail customer with disclosures related to a number of
potential options that the retail customer may not be qualified to
pursue).\535\ Nevertheless, in order to provide broker-dealers the
flexibility to determine how and when to make relevant disclosures
pursuant to the Disclosure Obligation, we are not mandating a
requirement that disclosures be made within a certain timeframe
preceding a recommendation. However, we continue to encourage broker-
dealers to consider whether it would be helpful to repeat or highlight
disclosures already made pursuant to the Disclosure Obligation at the
time of the recommendation.
---------------------------------------------------------------------------

    \534\ Proposing Release at 21605.
    \535\ Id.
---------------------------------------------------------------------------

    We are also clarifying the ability of a broker-dealer to
supplement, clarify, or update information after making a
recommendation.\536\ In particular, if a broker-dealer determines to
disclose information, in part, after the recommendation, such as in a
prospectus or trade confirmation, that disclosure may be used to
supplement, clarify, or update the initial, general disclosure. For
example, any necessary

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

    \536\ See id. In the proposal, we noted that there may be
material information that the broker-dealer may not be in a position
to disclose at or prior to the recommendation that may be revealed
following the transaction, such as the final transaction information
contained in a trade confirmation.
    \537\ In instances where a recommended transaction is not acted
upon by the retail customer, and therefore there is no subsequent
delivery of disclosure otherwise required by the transaction, the
fact that such information is not provided would not be a violation
of the Disclosure Obligation.
---------------------------------------------------------------------------

Layered Disclosure
    We proposed to require broker-dealers to provide disclosure prior
to or at the time of the recommendation but gave guidance on a number
of approaches they could take to achieve this requirement, including
providing layered disclosure, in which more general information is
supplemented by more detailed information provided either at the same
time or subsequently.\538\ We received a number of comments supporting
our proposed guidance concerning a layered approach to the Disclosure
Obligation.\539\ In addition, investor testing illustrates that many
retail investors support a layered approach as well.\540\
---------------------------------------------------------------------------

    \538\ See Proposing Release at 21605 (suggesting the Disclosure
Obligation could be satisfied, for example, at multiple points in
the relationship or through a layered approach to disclosure, such
as an initial disclosure conveying more general information
regarding the material fact or conflict followed by more specific
information in a subsequent disclosure).
    \539\ See, e.g., Commonwealth Letter (supporting a layered
disclosure approach that includes (i) the Relationship Summary at
the inception of the relationship; (ii) the traditional disclosures
included in account-opening agreements; (iii) product-specific
point-of-sale disclosures (e.g., prospectuses and alternative
investment offering documents); and (iv) more detailed disclosures
on the firm's website); IRI Letter (supporting a principles-based
disclosure regime, which leverages the benefits of layered
disclosure to combat information overload); Morgan Stanley Letter
(concurring with the Commission's proposed layered approach to
disclosure of material facts regarding the scope of the relationship
with the client and fees, as well as material conflicts of interest
associated with the recommendation); Stifel Letter; Mass Mutual
Letter; Triad Advisors Letter; Investacorp Letter; Ladenburg Letter.
    \540\ See, e.g., Study Regarding Financial Literacy Among
Investors As Required by Section 917 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, August 2012 at iv. A key finding
of the SEC staff's 917 study was that Investors favor ``layered''
disclosure and, wherever possible, the use of a summary document
containing key information about an investment product or service.
That study described layered disclosure as an ``approach to
disclosure in which key information is sent or given to the investor
and more detailed information is provided online and, upon request,
is sent in paper or by email.'' See Enhanced Disclosure and New
Prospectus Delivery Option for Registered Open-End Management
Investment Companies, Securities Act Release No. 8998 (Jan. 13,
2009). This layered approach is ``intended to provide investors with
better ability to choose the amount and type of information to
review, as well as the format in which to review it (online or
paper).'' Id. Other studies that considered the use of hyperlinks
for layered disclosure in proposed Form CRS suggested that retail
investors are generally interested in receiving additional
information, but recognized the possibility that retail investors
may not click on a hyperlink. See, e.g., RAND 2018 (finding 58% of
participants selecting ``very likely'' and another 32% selecting
``somewhat likely'' to click on a hyperlink relating to fees;
although no other potential hyperlink generated a majority with
``very likely'' usage, other potential hyperlinks concerning
services, conflicts and investor education generated a majority when
combining responses of ``very likely'' and ``somewhat likely'' to
click on the hyperlink). See also Kleimann Communication Group,
Inc., Report on Development and Testing of Model Client Relationship
Summary, Presented to AARP and Certified Financial Planner Board of
Standards, Inc. (Dec. 5, 2018), available at https://www.sec.gov/comments/s7-07-18/s70718-4729850-176771.pdf (indicating that while
some participants were interested in additional information, others
admitted they would not follow the links because it was extra
effort, they were uninterested, or the link did not itself suggest
what would be there).
---------------------------------------------------------------------------

    We have considered these comments and results of investor testing
and will continue to permit broker-dealers to use a layered approach to
disclosure. We acknowledge that different investors have different
preferences for the type and length of disclosures they receive, and
that some investors may not read additional information provided in any
particularized disclosure that supplements initial, standardized
disclosure. Nonetheless, we believe that permitting broker-dealers to
provide their retail customers with a standardized summary of
information supplemented by more particularized information will help
avoid the likelihood that retail customers receive a single,
potentially voluminous disclosure document, and enable the many
investors who prefer a shorter, summary document to have it available
to them, with additional information available should they wish to have
it. This approach to layering information is also consistent with our
concurrent effort in Form CRS to provide retail investors with high
level information and context concerning key material facts,
supplemented by additional layers of information regarding their
relationship.
    We also continue to believe that broker-dealers should have
flexibility in determining when to make disclosures and whether, in
light of their retail customer base, certain material facts would be
more effectively conveyed in a more general manner in an initial
written disclosure accompanied or followed by more specific information
in a separate disclosure. Similarly, we believe that providing broker-
dealers with flexibility to best target their disclosures to their
particular retail customer base will increase the likelihood that
investors will view them.
    The Commission is not prescribing specific procedures obligating
broker-dealers to fulfill the Disclosure Obligation in a particular
way. Rather, Regulation Best Interest as adopted provides broker-
dealers with flexibility to provide disclosures that are consistent
with the various ways in which broker-dealers may already provide
disclosure to their customers.\541\ This could include, for example,
providing multiple or ``layered'' disclosures either initially or over
time, but that in total constitute full and fair disclosure of the
information required by the Disclosure Obligation. While we are not
setting forth a prescriptive approach regarding exactly when
disclosures should be made as suggested by some commenters, we believe
that a broker-dealer may determine that certain disclosures are most
effective if they are made at multiple points of the relationship, or
alternatively, certain material facts may be conveyed in a more general
manner in an initial written disclosure accompanied or followed by more
specific information.\542\
---------------------------------------------------------------------------

    \541\ See Proposing Release at 21605.
    \542\ See id.
---------------------------------------------------------------------------

Updating Disclosures
    Several commenters recommend that the Commission clarify under what
circumstances a broker-dealer would be required to update prior
disclosures made pursuant to the Disclosure Obligation.\543\ Among the
suggestions are to only require broker-dealers to update their
disclosures when there are material changes to the disclosed

information; \544\ require broker-dealers to update their disclosures
at least 30 days before raising or imposing new fees; \545\ and require
broker-dealers to update their disclosures when changes are made, as
well as annually.\546\
---------------------------------------------------------------------------

    \543\ See, e.g., LPL August 2018 Letter (recommending that the
Commission provide additional guidance with respect to the updating
and amendment requirements that apply to the Disclosure Obligation);
CFA Institute Letter (recommending that the Commission require
broker-dealers to provide updated disclosures at least 30 days
before raising or imposing new fees); Bank of America Letter
(recommending that the Commission require firms to update existing
disclosures when there are changes to material conflicts of
interest, as well as annually); NAIFA Letter (recommending that the
Commission not require regular disclosure (e.g., quarterly, annual,
etc.) of any new information items, unless the information has
materially changed).
    \544\ See NAIFA Letter.
    \545\ See CFA Institute Letter.
    \546\ See Bank of America Letter.
---------------------------------------------------------------------------

    The Commission has carefully considered the commenters' suggestions
and is providing guidance on a broker-dealer's duty to update
disclosures made to customers under Regulation Best Interest. The
Disclosure Obligation requires broker-dealers to provide their retail
customers with full and fair disclosure of material facts related to
several aspects of their relationship with their customers. Therefore,
a broker-dealer cannot provide customers with full and fair disclosure
if the disclosures contain materially outdated, incomplete, or
inaccurate information. Additional disclosure will be necessary when
any previously provided information becomes materially inaccurate, or
when there is new relevant material information (e.g., a new material
conflict of interest has arisen that is not addressed by the
standardized disclosure).\547\ Therefore, a broker-dealer's duty to
update disclosures made to its customers under Regulation Best Interest
is based on the facts and circumstances.
---------------------------------------------------------------------------

    \547\ See Proposing Release at 21605.
---------------------------------------------------------------------------

    While we are not prescribing an explicit timeframe in which
required updates must be made, generally the Commission encourages
broker-dealers to update their disclosures to reflect material changes
or inaccuracies as soon as practicable, and thus generally should be no
later than 30 days after the material change; in the meantime, broker-
dealers are encouraged to provide, supplement, or correct any written
disclosure with oral disclosure as necessary prior to or at the time of
the recommendation.\548\ However, if updated information is to be
provided either orally, or after a recommendation, such disclosure must
be made under the circumstances outlined in Section II.C.1, Oral
Disclosure or Disclosure After a Recommendation.
---------------------------------------------------------------------------

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

2. Care Obligation
    We proposed the Care Obligation to require a broker-dealer, when
making a recommendation of any securities transaction or investment
strategy involving securities to a retail customer, to exercise
reasonable diligence, care, skill, and prudence to: (1) Understand the
potential risks and rewards associated with the recommendation, and
have a reasonable basis to believe that the recommendation could be in
the best interest of at least some retail customers; (2) have a
reasonable basis to believe that the recommendation is in the best
interest of a particular retail customer based on that retail
customer's investment profile and the potential risks and rewards
associated with the recommendation; and (3) have a reasonable basis to
believe that a series of recommended transactions, even if in the
retail customer's best interest when viewed in isolation, is not
excessive and is in the retail customer's best interest when taken
together in light of the retail customer's investment profile. As we
indicated in the Proposing Release, the Care Obligation was intended to
incorporate and enhance existing suitability requirements applicable to