transaction-based relationship. Accordingly, the Commission believes
specific disclosure and additional mitigation requirements are
appropriate to address those conflicts. Sales contests, sales quotas,
bonuses and non-cash compensation that are based on the sales of
specific securities within a limited period of time create high-
pressure situations for associated persons to increase the sales of
specific securities or specific types of securities within a limited
period of time and thus compromise the best interests of their retail
customers. The Commission does not believe such conflicts of interest
can be reasonably mitigated and, accordingly, they must be eliminated.
Phrasing of Standard
    We are adopting the phrasing ``act in the best interest of the
retail customer at the time the recommendation is made, without placing
the financial or other interest of the [broker-dealer] ahead of the
interest of the retail customer'' as it was proposed.\126\ In response
to comments, we are clarifying our views on what this standard entails
and how it compares to the ``without regard to'' language of Section
913.
---------------------------------------------------------------------------

    \126\ See paragraph (a)(1) of Regulation Best Interest. As
discussed in Section II.C.2, we are also adding the phrasing ``does
not place the financial or other interest of the broker, dealer, or
such natural person . . . ahead of the retail customer'' to certain
provisions of the Care Obligation.
---------------------------------------------------------------------------

    By replacing the ``without regard to'' language of Section 913(g)
and the 913 Study with the ``without placing the financial or other
interest of the [broker-dealer] . . . ahead of the interest of the
retail customer'' phrasing, we did not intend to create a ``lower'' or
``weaker'' standard compared to the language of Section 913(g) and the
913 Study. Rather, we are adopting a standard that reflects that a
broker-dealer should not put its interests ahead of the retail
customer's interest, and thereby aligns with (and in certain areas
imposes more specific obligations than) the investment adviser
fiduciary duty, at the time a broker-dealer makes a recommendation to a
retail customer.
    As discussed in the Proposing Release, we do not intend for our
standard to require a broker-dealer to provide conflict-free
recommendations. For example, under Regulation Best Interest, a broker-
dealer could recommend a more expensive or more remunerative security
or investment strategy if the broker-dealer has a reasonable basis to
believe there are other factors about the security or investment
strategy that make it in the best interest of the retail customer,
based on that retail customer's investment profile.\127\
---------------------------------------------------------------------------

    \127\ See Section II.C.2, Care Obligation.
---------------------------------------------------------------------------

    We also agree with commenters that we do not believe that is the
intent behind the ``without regard to'' phrase, as included in Section
913 of the Dodd-Frank Act or recommended in the 913 Study, as is
evident both from other provisions of Section 913 that acknowledge and
permit the existence of financial interests under that standard, and
how our staff articulated the recommended uniform fiduciary standard in
the 913 Study.\128\

Nevertheless, we are concerned that there is a risk that the ``without
regard to'' language would be inappropriately construed to require a
broker-dealer to eliminate all of its conflicts when making a
recommendation (i.e., require recommendations that are conflict free),
which we believe could ultimately harm retail investors by reducing
their access to differing types of investment services and products and
by increasing their costs.
---------------------------------------------------------------------------

    \128\ See Proposing Release at 21590. As noted in the proposal,
among other things, Dodd-Frank Act Section 913(g) expressly provides
that the receipt of commission-based compensation, or other standard
compensation, for the sale of securities shall not, in and of
itself, violate any uniform fiduciary standard promulgated under
that subsection's authority as applied to a broker-dealer. Moreover,
Section 913(g) does not itself require the imposition of the
principal trade provisions of Advisers Act Section 206(3) on broker-
dealers. In addition, Dodd-Frank Act Section 913 provides that
offering only proprietary products by a broker-dealer shall not, in
and of itself, violate such a uniform fiduciary standard, but may be
subject to disclosure and consent requirements. See Exchange Act
Section 15(k)(1) and Advisers Act Section 211(g)(1). See also 913
Study at 113; Proposing Release at 21590.
---------------------------------------------------------------------------

    The potential for a range of different meanings to be given to the
phrase ``without regard to'' was heightened by the DOL's use of this
same language for purposes of the Impartial Conduct Standards set forth
in the BIC Exemption. We recognize, as noted by some commenters, that
the DOL interpretation of this phrase does not require ``conflict-
free'' recommendations. Nevertheless, because of the differences in the
approach to the treatment of conflicts under ERISA and under the
federal securities laws--ERISA starts by prohibiting conflicts and then
through exemptions permits certain conflicts, whereas the federal
securities laws generally start with disclosure and become more
restrictive--we share commenters' concerns that DOL's use of the
``without regard to'' language could alter the way in which conflicts
are viewed and cause a substantial portion of conduct that is currently
permitted, and reasonably accepted and desired by retail customers, to
be limited or eliminated. Based on market participant experience with
the implementation of--and reaction to the subsequent overturning of--
the DOL Fiduciary Rule, in particular the BIC Exemption,\129\ we
continue to believe that it is better to use language that provides
similar investor protections, but does not raise these legal
ambiguities.
---------------------------------------------------------------------------

    \129\ See supra footnotes 33 and 34 (citing reduction in
services and increase in costs following DOL).
---------------------------------------------------------------------------

    The ``without placing the financial or other interest . . . ahead
of the interest of the retail customer'' phrasing recognizes that while
a broker-dealer will inevitably have some financial interest in a
recommendation--the nature and magnitude of which will vary--the
broker-dealer's interests cannot be placed ahead of the retail
customer's interest.\130\ Accordingly, we believe this phrasing
establishes a standard that enhances investor protection by prohibiting
a broker-dealer from placing its interests ahead of the retail
customer's interests, and preserves investor access (in terms of both
choice and cost) to differing types of investment services and
products.
---------------------------------------------------------------------------

    \130\ In this vein, we believe that a broker-dealer's
``financial interest'' is broad, and that a broker-dealer is
unlikely to have an ``other interest'' that is not a ``financial
interest.'' See, e.g., Proposing Release at 21618 (noting ``. . .
our interpretation of the types of material conflicts of interest
arising from financial incentives is broad. . .'').
---------------------------------------------------------------------------

    The phrasing also aligns with an investment adviser's fiduciary
obligation. As discussed in the Fiduciary Interpretation, an investment
adviser's fiduciary duty under the Advisers Act comprises a duty of
care and a duty of loyalty.\131\ The fiduciary duty requires that an
adviser ``adopt the principal's goals, objectives, or ends.'' \132\
This means the adviser must, at all times, serve the best interest of
its clients and not subordinate its client's interest to its own. In
other words, the investment adviser cannot place its own interests
ahead of the interests of its client.\133\ This combination of care and
loyalty obligations has been characterized as requiring the investment
adviser to act in the ``best interest'' of its client at all
times.\134\
---------------------------------------------------------------------------

    \131\ See, e.g., Proxy Voting by Investment Advisers, Advisers
Act Release No. 2106 (Jan. 31, 2003) (``Investment Advisers Release
No. 2106''). See also Fiduciary Interpretation.
    \132\ Arthur B. Laby, The Fiduciary Obligations as the Adoption
of Ends, 56 Buffalo Law Review 99 (2008); see also Restatement
(Third) of Agency, Sec.  2.02 Scope of Actual Authority (2006)
(describing a fiduciary's authority in terms of the fiduciary's
reasonable understanding of the principal's manifestations and
objectives). See Fiduciary Interpretation.
    \133\ See Fiduciary Interpretation.
    \134\ Id. See also Amendments to Form ADV, Advisers Act Release
No. 3060 (Jul. 28, 2010) (adopting amendments to Form ADV and
stating that ``under the Advisers Act, an adviser is a fiduciary
whose duty is to serve the best interests of its clients, which
includes an obligation not to subrogate clients' interests to its
own,'' citing Investment Advisers Act Release 2106). See SEC v.
Tambone, 550 F.3d 106, 146 (1st Cir. 2008) (``Section 206 imposes a
fiduciary duty on investment advisers to act at all times in the
best interest of the fund. . .''); SEC v. Moran, 944 F. Supp. 286,
297 (S.D.N.Y 1996) (``Investment advisers are entrusted with the
responsibility and duty to act in the best interest of their
clients.'').
---------------------------------------------------------------------------

    Language that would require a broker-dealer to put the retail
customer's interest ``first'' arguably raises many of the same concerns
as the ``without regard to'' language. Accordingly, we are adopting a
formulation in Regulation Best Interest that is consistent with how we
describe the duty of loyalty for investment advisers in the Fiduciary
Interpretation--that is, a requirement not to place the adviser's
interests ahead of the interests of its client.\135\
---------------------------------------------------------------------------

    \135\ See Fiduciary Interpretation at footnote 54 (stating that,
in practice, referring to putting a client's interest first is a
plain English formulation commonly used by investment advisers to
explain their duty of loyalty in a way that may be more
understandable to retail clients).
---------------------------------------------------------------------------

    While we are not revising this phrasing of the standard, we
appreciate concerns raised by commenters about clarifying whether this
standard permits broker-dealers to allow their conflicts to taint their
recommendations or to allow broker-dealers to make recommendations that
are motivated by their own interests or to put their interests first.
We discuss below what it means to ``act in the best interests,''
particularly in the context of satisfying the Care and Conflict of
Interest Obligations. Specifically, we clarify that the obligations set
forth in Regulation Best Interest are intended to require broker-
dealers to take steps to reduce the effect of (and in some cases
eliminate) conflicts that create an incentive to place a broker-
dealer's or an associated person's interest ahead of the retail
customer's interest when making a recommendation, and to make
recommendations in the best interest of the retail customer even where
conflicts continue to exist. We believe that this approach will result
in a standard of conduct that is consistent with what a reasonable
retail customer would expect.\136\
---------------------------------------------------------------------------

    \136\ See, e.g., Brian Scholl, et al., SEC Office of the
Investor Advocate and RAND Corporation, The Retail Market for
Investment Advice (2018), available at https://www.sec.gov/comments/s7-07-18/s70718-4513005-176009.pdf (``OIAD/RAND''). OIAD/RAND
summarized the results of focus groups, indicating that in the
context of discussing expectations for standards of conduct, ``the
groups typically expected that a financial professional who is
acting in a client's best interest'' to, among other things,
``disclose payments they receive that might influence their advice
[and] avoid taking higher compensation for selling one product over
a similar but less costly product.'' Further, OIAD/RAND summarized
focus group comments on professionals' form of compensation, noting
that ``although many participants prefer that a professional be
compensated by the client alone, some might not rule out using a
professional who is receiving other compensation, for example if the
compensation is openly disclosed and they are comfortable with the
professional.'' The SEC's Office of Investor Advocate and the RAND
Corporation prepared this research report regarding the retail
market of investment advice prior to, and separate from, our
rulemaking proposals. This report was included in the comment file
at https://www.sec.gov/comments/s7-07-18/s70718-4513005-176009.pdf.
See also, e.g., Washington, DC Roundtable at 49 (``So it seems to me
that there is a tight connection between the obligation that you
have, and our obligations down below here to the conflicts of
interest, that it's really important that advisers or brokers spell
out what conflicts of interest they have, and what that means in
real terms to the person before they make a choice, for example'').

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

    Finally, although our standard draws from key fiduciary principles,
for various reasons, including to emphasize that Regulation Best
Interest is tailored to the broker-dealer relationship and distinct
from the investment adviser fiduciary duty, we are not referring to
Regulation Best Interest as a ``fiduciary'' standard, and we emphasize
that Regulation Best Interest is separate from any common law analysis
of whether a broker-dealer has fiduciary duties.\137\ As noted in the
proposal, fiduciary standards vary, for example, for investment
advisers, banks acting as trustees or fiduciaries, and fiduciaries to
ERISA plans. As we have learned through our consideration of the
Relationship Summary Proposal, and from various investor studies, using
the term ``fiduciary'' to describe the standard may not sufficiently
convey meaning regarding the specific substance of the standard.\138\
In addition, we appreciate commenters' concerns that using the term in
the context of a different relationship may introduce further legal or
compliance ambiguity.\139\
---------------------------------------------------------------------------

    \137\ In addition to the antifraud provisions of the federal
securities laws, courts interpreting state common law have imposed
fiduciary obligations on broker-dealers in certain circumstances.
See Proposing Release at 21584. Generally, courts have found that
broker-dealers that exercise discretion or control over customer
assets, or have a relationship of trust and confidence with their
customers, owe customers a fiduciary duty. Id. In developing
proposed Regulation Best Interest, the Commission has drawn from
principles that apply to investment advice under other regulatory
regimes, including state common law fiduciary principles, among
others. By doing so, we hope to establish greater consistency in the
level of retail customer protections and to make it easier to comply
with Regulation Best Interest where other legal regimes, such as
state common law drawing upon comparable fiduciary principles, might
also apply.
    \138\ See, e.g., RAND 2018 (``Some participants had never heard
of the word, whereas others had heard it but did not know what it
meant in this context. Others thought the word ``fiduciary implies
acting in best interest . . .''). We have modified the standard of
conduct disclosure required by Form CRS to eliminate technical
words, such as ``fiduciary,'' and describe the standards of conduct
of broker-dealers, investment advisers, or dual-registrants using
similar terminology in a plain-English manner. In particular, Form
CRS uses the term ``best interest'' to describe how broker-dealers,
investment advisers, and dual-registrants must act regarding their
retail customers or clients when providing recommendations as a
broker-dealer or acting as an investment adviser. See Relationship
Summary Adopting Release.
    \139\ See, e.g., Stifel Letter.
---------------------------------------------------------------------------

    As articulated in the Proposing Release, we appreciate the desire
for clarity about the requirements imposed by Regulation Best Interest,
and we have sought to provide such clarity by specifying by rule the
specific components with which a broker-dealer is required to comply to
satisfy its best interest obligation. The changes we are making from
the Proposing Release to this final Regulation Best Interest and the
additional interpretations and guidance we are providing are intended
to further clarify how a broker-dealer could comply with these
requirements.
    As noted above and discussed in the Fiduciary Interpretation, an
investment adviser's fiduciary duty under the Advisers Act requires the
adviser to act in the best interests of its clients. We have chosen to
describe the standard by referring directly to what the standard
requires at the time a recommendation is made.\140\ Furthermore, while
key elements of the standard of conduct that applies to broker-dealers
under Regulation Best Interest will be substantially similar to key
elements of the standard of conduct that applies to investment advisers
pursuant to their fiduciary duty under the Advisers Act at the time
that a recommendation is made, we are concerned that using the term
``fiduciary'' to describe a broker-dealer's obligations under
Regulation Best Interest may create confusion by suggesting that the
standards of conduct are identical in all respects, when there are key
differences as noted above, including the scope of the of the duty
(e.g., the application of the adviser's fiduciary duty to the entire
relationship versus Regulation Best Interest's recommendation-specific
application, and the application of an adviser's fiduciary duty to all
clients as opposed to Regulation Best Interest's application to retail
customers).\141\
---------------------------------------------------------------------------

    \140\ As discussed in the Relationship Summary Adopting Release,
we are adopting a requirement in Form CRS for a description of a
firm's applicable standard of conduct using prescribed wording.
    \141\ See Fiduciary Interpretation.
---------------------------------------------------------------------------

    Similarly, while we are not harmonizing the phrasing of the best
interest standard with the DOL's definition of ``best interest'' as
reflected in the BIC Exemption's Impartial Conduct Standards, as
suggested by some commenters,\142\ or otherwise adopting some or all
conditions of the BIC Exemption, we gave careful consideration to the
DOL Fiduciary Rule in developing Regulation Best Interest.\143\
Regulation Best Interest takes into account both market participant
experience with the implementation of--and reaction to the subsequent
overturning of the DOL Fiduciary Rule, in particular the BIC Exemption.
As discussed in the Proposing Release, we believe Regulation Best
Interest is consistent with many of the key components of the DOL's
Impartial Conduct Standards. Regulation Best Interest incorporates
principles underlying the DOL Fiduciary Rule--such as the concept of
conflict mitigation--that, based on our expertise in regulating the
broker-dealer industry, we believe would further our goal of reducing
the effect of conflicts on recommendations and would promote
recommendations in the best interest of the retail customer even where
conflicts continue to exist.
---------------------------------------------------------------------------

    \142\ See AARP August 2018 Letter; Wells Fargo Letter; Schwab
Letter; NASAA August 2018 Letter.
    \143\ On March 15, 2018, the DOL Fiduciary Rule was vacated by
the United States Court of Appeals for the Fifth Circuit. Chamber of
Commerce v. U.S. Dep't of Labor, 885 F.3d 360 (5th Cir. 2018).
---------------------------------------------------------------------------

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

rule text as suggested by some commenters, we are providing
interpretations and guidance regarding the application of the specific
component obligations and in particular what it means to make a
recommendation in the retail customer's ``best interest.'' Consistent
with the proposal, compliance with each of the specific component
obligations of Regulation Best Interest, including the ``best
interest'' requirement in the Care Obligation, will be applied in a
principles-based manner. This principles-based approach to determining
what is in the ``best interest'' is similar to an investment adviser's
fiduciary duty, which has worked well for advisers' retail clients and
our markets. As proposed, whether a broker-dealer has acted in the
retail customer's best interest will turn on an objective assessment of
the facts and circumstances of how the specific components of
Regulation Best Interest are satisfied at the time that the
recommendation is made (and not in hindsight). In particular, whether a
broker-dealer's recommendation satisfies the requirements of the Care
Obligation is an objective evaluation that is not susceptible to a
bright line test; rather it turns on the facts and circumstances of the
particular recommendation and the particular retail customer, at the
time the recommendation is made. This facts-and-circumstances approach
recognizes that one size does not fit all, and what is in the best
interest of one retail customer may not be in the best interest of
another.
    We understand that markets evolve and we encourage broker-dealers
to have an open dialogue with the Commission and Commission's staff as
questions arise.
    As a general matter, however, in response to comments, we are
changing guidance in the Proposing Release stating that under
Regulation Best Interest, a broker-dealer's financial interests cannot
be the ``predominant motivating factor behind'' a recommendation, and
that a ``broker-dealer would violate proposed Regulation Best
Interest's Care Obligation and Conflict of Interest Obligations, if any
recommendation was predominantly motivated by the broker-dealer's self-
interest.'' \144\ Many commenters expressed concerns regarding and
requested removal of the ``predominantly motivated'' language, stating
that it contradicted statements that there was no scienter requirement
under Regulation Best Interest by requiring a consideration of intent,
creating ambiguity as to what extent a broker-dealer's interests could
influence its recommendations or requiring a weighing of the broker-
dealer's interests against the retail customer's interests.\145\ Some
commenters, however, indicated support for the ``predominantly
motivated language'' in the context of agreeing with the Commission's
proposed ``without placing the financial or other interest . . .
ahead'' phrasing of the best interest standard.\146\
---------------------------------------------------------------------------

    \144\ See Proposing Release at 21588.
    \145\ See CFA August 2018 Letter; Better Markets August 2018
Letter; Wells Fargo Letter.
    \146\ See AXA Letter; FSI August 2018 Letter.
---------------------------------------------------------------------------

    In consideration of these comments, we are modifying these
statements to remove this language and to clarify our intent.
Specifically, Regulation Best Interest recognizes that while a broker-
dealer will inevitably have some financial interest in a
recommendation--the nature and magnitude of which will vary--the
broker-dealer's interests cannot be placed ahead of the retail
customer's interest.\147\ Accordingly, Regulation Best Interest will
not per se prohibit a broker-dealer from making recommendations where
conflicts of interest are present.\148\ Instead, Regulation Best
Interest includes specific requirements for broker-dealers to address
their conflicts of interest.\149\ These specific requirements are
designed to promote recommendations that are in the best interest of
the retail customer despite the existence of these conflicts of
interest. In other words, recommendations involving conflicts of
interest between the broker-dealer and the retail customer will be
permissible under Regulation Best Interest only to the extent that the
broker-dealer satisfies the specific requirements of Regulation Best
Interest.
---------------------------------------------------------------------------

    \147\ See id. See infra Section II.C.2.
    \148\ Such conflicts of interest may include: Charging
commissions or other transaction-based fees; receiving or providing
differential compensation based on the product sold; receiving
third-party compensation; recommending proprietary products,
products of affiliates or a limited range of products; recommending
a security underwritten by the broker-dealer or a broker-dealer
affiliate, including initial public offerings (``IPOs'');
recommending a transaction to be executed in a principal capacity;
allocating trades and research, including allocating investment
opportunities (e.g., IPO allocations or proprietary research or
advice) among different types of customers and between retail
customers and the broker-dealer's own account; considering cost to
the broker-dealer of effecting the transaction or strategy on behalf
of the customer (for example, the effort or cost of buying or
selling a complex or an illiquid security); or accepting a retail
customer's order that is contrary to the broker-dealer's
recommendations. While these practices will not be per se prohibited
by Regulation Best Interest, we are also not saying that these
practices are per se consistent with Regulation Best Interest or
other obligations under the federal securities laws. See also
Proposing Release at 21587.
    \149\ Id at 21588.
---------------------------------------------------------------------------

    Further, for the reasons discussed in the proposal, we confirm that
Regulation Best Interest is not intended to limit or eliminate
recommendations that encourage diversity in a retail customer's
portfolio through investment in a wide range of products, including,
when appropriate, products that may involve higher risks or cost to the
retail customer, as these products may be in the best interest of
certain retail customers at certain times or in certain
circumstances.\150\ Regulation Best Interest will not necessarily
obligate a broker-dealer to recommend the ``least expensive'' or the
``least remunerative'' security or investment strategy, provided the
broker-dealer complies with the specific component obligations.\151\ In
other words, Regulation Best Interest will allow a broker-dealer to
recommend products that entail higher costs or risks for the retail
customer, or that result in greater compensation to the broker-dealer,
or that are more expensive, than other products, provided that the
broker-dealer complies with the specific component obligations detailed
below,\152\ including the requirement to make these recommendations
exercising reasonable diligence, care, and skill to have a reasonable
basis to believe that the recommendation is in the retail customer's
best interest and does not place the broker-dealer's interest ahead of
the retail customer's interest.
---------------------------------------------------------------------------

    \150\ Id.
    \151\ See id.
    \152\ See id.
---------------------------------------------------------------------------

    Finally, some commenters sought additional clarity whether
Regulation Best Interest would extend beyond a particular
recommendation, impose a duty to monitor the retail customer's account,
or apply to unsolicited orders.\153\ We confirm that, consistent with
the Proposing Release and as discussed further below, Regulation Best
Interest would not: (1) Extend beyond a particular recommendation \154\
or generally require a broker-dealer to have a continuous duty to a
retail customer or impose a duty to monitor; \155\ (2) require the
broker-dealer

to refuse to accept a customer's order that is contrary to the broker-
dealer's recommendation; or (3) apply to self-directed or otherwise
unsolicited transactions by a retail customer, whether or not she also
receives separate recommendations from the broker-dealer.
---------------------------------------------------------------------------

    \153\ See, e.g., SIFMA August 2018 Letter; Transamerica August
2018 Letter; see also generally CFA August 2018 Letter; Better
Markets August 2018 Letter.
    \154\ However, paragraph (a)(2)(iii)(C) of Regulation Best
Interest addresses a series of recommended transactions. See Section
II.C.2.d.
    \155\ However, as discussed below, it is our position that when
a broker-dealer agrees with a retail customer to provide account
monitoring services: (1) The broker-dealer would be required to
disclose the material facts (including scope and frequency) of those
services pursuant to the Disclosure Obligation, and (2) such agreed-
upon account monitoring services involve an implicit recommendation
to hold (i.e., an implicit recommendation not to buy, sell, or
exchange assets pursuant to that securities account review) at the
time agreed-upon monitoring occurs, which is a recommendation ``of
any securities transaction or investment strategy involving
securities'' covered by Regulation Best Interest.
---------------------------------------------------------------------------

B. Key Terms and Scope of Best Interest Obligation

1. Natural Person Who Is an Associated Person
    In the Proposing Release, we stated that a ``natural person who is
an associated person'' is a natural person who is an associated person
as defined in Section 3(a)(18) of the Exchange Act: ``any partner,
officer, or director or branch manager of such broker or dealer (or any
person occupying a similar status or performing similar functions); any
person directly or indirectly controlling, controlled by, or under
common control with such broker or dealer; or any employee of such
broker or dealer, except that any person associated with a broker or
dealer whose functions are solely clerical or ministerial shall not be
included in the meaning of such term for purposes of Section 15(b) of
this title (other than paragraph 6 thereof).'' \156\ In limiting the
term to only a ``natural person who is an associated person,'' we
sought to exclude affiliated entities of the broker-dealer that are not
themselves broker-dealers, as they are not the intended focus of
Regulation Best Interest.\157\
---------------------------------------------------------------------------

    \156\ Proposing Release at 21592-21593.
    \157\ Id.
---------------------------------------------------------------------------

    We solicited comment on whether the application of the definition
was appropriate, alternative definitions should be considered, or the
scope should be broadened or narrowed. We received no comments and, for
the reasons discussed in the Proposing Release, are using the term
``natural person who is an associated person,'' consistent with the
definition in Section 3(a)(18) of the Exchange Act.\158\
---------------------------------------------------------------------------

    \158\ Id.
---------------------------------------------------------------------------

2. Recommendation of Any Securities Transaction or Investment Strategy
Involving Securities
    We proposed to apply Regulation Best Interest to broker-dealer
recommendations of any securities transaction or investment strategy
involving securities to a retail customer. We believed that by applying
Regulation Best Interest to a ``recommendation,'' as that term is
currently interpreted under broker-dealer regulation, we would make
clear when the obligation applied and would maintain efficiencies for
broker-dealers that have already established infrastructures to comply
with suitability obligations, which are recommendation-based.\159\
Moreover, we believed that focusing on each recommendation would
appropriately capture and reflect the various types of recommendations
that broker-dealers make to retail customers, whether on an episodic,
periodic, or more frequent basis and would help ensure that retail
customers receive the protections that Regulation Best Interest is
intended to provide. We received numerous comments supporting our
general proposed approach to what is a ``recommendation,'' while
several commenters suggested modifications regarding the scope of a
recommendation or sought additional clarity regarding particular
scenarios.\160\
---------------------------------------------------------------------------

    \159\ Id.
    \160\ See generally SIFMA August 2018 Letter; Financial Engines
Letter; IPA Letter; Putnam Letter; Cambridge Letter (recommending
the Commission adopt FINRA's approach to determining whether a
communication is a ``recommendation''). But see NASAA August 2018
Letter; BlackRock Letter; FSI August 2018 Letter (recommending
modifications or clarifications to ``recommendation'').
---------------------------------------------------------------------------

    As we indicated in the Proposing Release, in our view, the
determination of whether a broker-dealer has made a recommendation that
triggers application of Regulation Best Interest should turn on the
facts and circumstances of the particular situation and therefore,
whether a recommendation has taken place is not susceptible to a bright
line definition. Factors considered in determining whether a
recommendation has taken place include whether the communication
``reasonably could be viewed as a `call to action''' and ``reasonably
would influence an investor to trade a particular security or group of
securities.'' \161\ The more individually tailored the communication to
a specific customer or a targeted group of customers about a security
or group of securities, the greater the likelihood that the
communication may be viewed as a ``recommendation.'' We continue to
believe this general framework regarding what is a recommendation is
appropriate, and for the reasons discussed in the Proposing Release,
are taking this approach.\162\
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    \161\ See Proposing Release at 21592-21593; see also NASD Notice
to Members 01-23, Online Suitability--Suitability Rules and Online
Communications (Apr. 2001); Notice of Filing Proposed Rule Change to
Adopt FINRA Rule 2090 (Know Your Customer) and FINRA Rule 2111
(Suitability) in the Consolidated FINRA Rulebook, Exchange Act
Release No. 62718 (Aug. 13, 2010), 75 FR 51310 (Aug. 19, 2010), as
amended, Exchange Act Release No. 67218A (Aug. 20, 2010), 75 FR
52562 (Aug. 26, 2010) (discussing what it means to make a
``recommendation'').
    \162\ See Proposing Release at 21592-21593.
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    While certain commenters recommended formally defining the term
``recommendation,'' including what does not come within that term,\163\
other commenters maintained there is no need to define
``recommendation'' and expressed support for harmonizing the term in
accordance with existing broker-dealer guidance and case law.\164\ We
agree with commenters that clarity is important, and we continue to
believe that the current principles-based approach underlying existing
Commission precedent and guidance will provide effective clarity. Being
more prescriptive could result in a definition that is over inclusive,
under inclusive, or both.\165\ We believe that what constitutes a
recommendation is highly fact-specific and not conducive to an express
definition in the rule text. Furthermore, we believe that the existing
framework has worked well, that broker-dealers generally are familiar
with the existing framework, and therefore, that this approach should
continue. Accordingly, we are taking the approach as set forth in the
Proposing Release, which we believe provides a workable framework and
clarity for broker-dealers regarding the contours of a recommendation.
To provide further clarity, in response to comments, we describe below
the types of communications that we generally view

as falling outside of the scope of a recommendation.
---------------------------------------------------------------------------

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

    We are also generally confirming our interpretation in the
Proposing Release of the phrase ``any securities transaction or
investment strategy involving securities.'' However, in response to
comments regarding the coverage of certain securities or investment
strategies, we are providing further clarity regarding our
interpretation of this phrase, and in certain instances, refining our
interpretation. For example, as discussed more fully below, we are
confirming our interpretation that recommendations of ``any securities
transaction'' (purchase, sale, or exchange) and any ``investment
strategy'' involving securities (including an explicit hold
recommendation) are recommendations ``of any securities transaction or
investment strategy involving securities.''
    In addition, we are generally confirming our interpretation that a
broker-dealer may agree with a retail customer to take on additional
obligations beyond those imposed by Regulation Best Interest, for
example, by agreeing with a retail customer to provide monitoring of
the retail customer's investments on a periodic basis for purposes of
recommending changes in investments.\166\ In response to comments, it
is our position that when a broker-dealer agrees \167\ with a retail
customer to monitor that customer's account: (1) The broker-dealer is
required to disclose the terms of such account monitoring services
(including the scope and frequency of those services) pursuant to the
Disclosure Obligation \168\ and (2) such agreed-upon monitoring
involves an implicit recommendation to hold (i.e., recommendation not
to buy, sell, or exchange assets pursuant to that securities account
review) at the time the agreed-upon monitoring occurs, which is a
recommendation ``of any securities transaction or investment strategy
involving securities'' covered by Regulation Best Interest.\169\ As
discussed further below, in our view, a recommendation of ``an
investment strategy'' includes implicit hold recommendations in this
context, where the broker-dealer has agreed to monitor a retail
customer's account.\170\ We are interpreting the phrase ``any security
transaction or investment strategy'' to include instances where there
is an agreement to monitor because in this context there is an implicit
recommendation to hold at the time the agreed-upon monitoring occurs
when the broker-dealer does not provide an express recommendation to
buy, sell, or hold.\171\
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    \166\ Proposing Release at 21594-21595. The Proposing Release
referred to ``ongoing'' monitoring of the retail customer's
investments for purposes of recommending changes in investments. Id.
In the discussion that follows and the Solely Incidental
Interpretation, we are clarifying our views regarding broker-dealer
account monitoring services, and the application of Regulation Best
Interest to such services. As discussed in the Solely Incidental
Interpretation, a broker-dealer that agrees to monitor a retail
customer's account on a periodic basis for purposes of providing
buy, sell, or hold recommendations may still be considered to
provide advice in connection with and reasonably related to
effecting securities transactions. Broker-dealers may choose to
adopt policies and procedures that, if followed, would help
demonstrate that any agreed-upon monitoring is in connection with
and reasonably related to the broker-dealer's primary business of
effecting securities transactions. See Solely Incidental
Interpretation.
    \167\ An agreement to provide account monitoring services to a
retail customer is not required to be in writing (although whether
or not the broker-dealer is providing account monitoring services,
and, if so, the scope and frequency of such monitoring services,
must be disclosed in writing pursuant to the Disclosure Obligation).
For example, a broker-dealer's oral undertaking that the broker-
dealer will monitor the retail customer's account on a periodic
basis would create an agreement to monitor the account on the terms
specified orally. Whether an agreement with the retail customer has
been established in the absence of a written agreement or express
oral undertaking will depend on an objective inquiry of the
particular facts and circumstances, including reasonable retail
customer expectations arising from the broker-dealer's course of
conduct. In cases where a broker-dealer does not intend to create an
implied agreement to monitor the retail customer's account through
course of conduct or otherwise, and to avoid ambiguity over whether
an implied agreement has been formed, broker-dealers should take
steps to ensure that all communications with the retail customer are
consistent with its disclosures required under the Disclosure
Obligation, which in this case would require the broker-dealer to
clearly disclose that the broker-dealer does not monitor the retail
customer's account.
    \168\ To avoid ambiguity over whether or when an implicit hold
recommendation has been made, this disclosure should identify with
specificity when the agreed upon monitoring will occur. See also
FINRA Regulatory Notice 12-25 at Q14.
    \169\ See IAC 2018 Recommendation; NAIFA Letter; AFL-CIO April
2019 Letter; see also FINRA Regulatory Notice 12-25, Suitability--
Additional Guidance on FINRA's New Suitability Rule (May 2012) at Q3
and accompanying footnotes.
    \170\ See FINRA Rule 2111.03; FINRA Regulatory Notice 12-25. The
Commission recognizes that its position with respect to Regulation
Best Interest differs from that provided in FINRA guidance regarding
whether implicit hold recommendations are subject to the suitability
rule. This interpretation applies in the context of the protections
of Regulation Best Interest, and does not change the scope of the
application of the FINRA suitability rule. Further, while for
purposes of Regulation Best Interest implicit hold recommendations
are generally recommendations of ``any securities transaction or
investment strategy regarding securities'' where a broker-dealer
agrees to provide account monitoring services, we are not otherwise
addressing the treatment of implicit hold recommendations in other
contexts. In other words, except where a broker-dealer agrees to
provide account monitoring services as described, consistent with
existing FINRA guidance, Regulation Best Interest will only apply to
explicit hold recommendations. See FINRA Regulatory Notice 12-25 at
Q3 and accompanying footnotes.
    \171\ Our interpretation is generally consistent with
commenters' views regarding the application of Regulation Best
Interest to implicit hold recommendations in the context of agreed-
upon account monitoring services. See IAC 2018 Recommendation (``we
believe the best interest standard should be applied to the broker-
dealer's monitoring of the customer account, where brokers provide
ongoing services to the account. In essence, this would apply the
best interest standard to the implicit ``no recommendation''
recommendation that a broker makes when reviewing the account and
recommending no change.''); NAIFA Letter (asserting broker-dealers
should be free to agree to, and define the nature of, any ongoing
relationship via contract, such as including monitoring services).
See also AFL-CIO April 2019 Letter (``adopt a principles-based
obligation to monitor the account, where the nature and extent of
the monitoring follows the contours of the relationship''). See also
supra footnote 166 (encouraging broker-dealers to adopt policies and
procedures that, if followed, would help demonstrate that any
agreed-upon monitoring is in connection with and reasonably related
to the broker-dealer's primary business of effecting securities
transactions in accordance with the Solely Incidental
Interpretation).
---------------------------------------------------------------------------

    We recognize that a broker-dealer may voluntarily, and without any
agreement with the customer, review the holdings in a retail customer's
account for the purposes of determining whether to provide a
recommendation to the customer. We do not consider this voluntary
review to be ``account monitoring,'' nor would it in itself create an
implied agreement with the retail customer to monitor the customer's
account. Any explicit recommendation made to the retail customer as a
result of any such voluntary review would be subject to Regulation Best
Interest.
    Finally, in response to comments received, we have modified the
rule text to provide that an ``investment strategy involving
securities'' includes ``account recommendations.'' We interpret
``account recommendations'' to include recommendations of securities
account types generally, as well as recommendations to roll over or
transfer assets from one type of account to another (e.g., workplace
retirement plan to an IRA). As discussed in more detail below, we
believe that recommendations of securities account types are consistent
with the types of recommendations that have been treated as investment
strategies,\172\ because the

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

    \172\ Although FINRA has stated that a recommendation concerning
the type of workplace retirement plan account in which a customer
should hold his retirement investments typically involves a
recommended securities transaction, and thus is subject to
suitability requirements, FINRA did not address whether such a
recommendation would be an investment strategy in the absence of
such a recommended securities transaction. FINRA Regulatory Notice
13-45, Rollovers to Individual Retirement Accounts--FINRA Reminds
Firms of Their Responsibilities Concerning IRA Rollovers (Dec.
2013). Taking this approach is consistent with Commission precedent
finding a recommendation of a margin strategy to be unsuitable under
the NASD suitability rule, in light of the associated transactions
costs and the impact the strategy could have on customer returns.
See F.J. Kaufman & Co., 50 SEC. 164 (1989) (Commission Opinion)
(stating that a broker-dealer recommending the purchase of
securities using a margin strategy ``at a minimum . . . had an
obligation to understand that, in light of the applicable
transaction costs, the two components of his recommended strategy,
when combined, always would have produced returns inferior to those
that could have been obtained from one of those components
alone.'').
    \173\ See SEC Office of Investor Education and Advocacy, Updated
Investor Bulletin: How Fees and Expenses Affect Your Investment
Portfolio (Sep. 2016).
    \174\ In addition to brokerage versus investment advisory
accounts, there are also many options or account types within
brokerage accounts. For example, brokerage accounts can include:
Education accounts (e.g., 529 Plans and tax-free Coverdell
accounts); retirement accounts (e.g., IRA, Roth IRA, or SEP-IRA
accounts); and specialty accounts (e.g., cash or margin accounts,
and accounts with access to Forex or options trading). Different
brokerage accounts can also offer different levels of services, such
as access to online trading, or can offer different products, for
example, in higher dollar amount accounts (e.g., access to products
with break-points).
    \175\ See, e.g., IAC 2018 Recommendation (``Decisions about
which type of account to open have the potential to greatly affect
their costs. Moreover, both rollover and account type
recommendations are recommendations of an `investment strategy
involving securities' that can have substantial potential long-term
impacts on investors. Both types of recommendations inherently
involve potential conflicts of interest, making it critical that
advisers and brokers put their clients' interests ahead of their own
in making such recommendations.''); Capital Group Letter (``Choosing
between a brokerage and an advisory account is an incredibly
impactful decision for investors. It is very important that these
recommendations be made in the best interest of the retail
[customer].'').
---------------------------------------------------------------------------

a. Recommendation
    We interpret whether a ``recommendation'' has been made to a retail
customer that triggers the best interest obligation consistent with
precedent under the anti-fraud provisions of the federal securities
laws as applied to broker-dealers, and with how the term has been
applied under the rules of self-regulatory organizations
(``SROs'').\176\ Several commenters supported this approach, and
specifically agreed with following the existing facts and circumstances
approach as understood under federal securities laws and SRO
rules.\177\
---------------------------------------------------------------------------

    \176\ See Proposing Release at 21592-21595. In this regard,
Regulation Best Interest does not extend beyond a particular
recommendation, for example, by imposing a general broker-dealer
duty to monitor a customer's account or by applying the duty to
unsolicited orders.
    \177\ See, e.g., AXA Letter; SIFMA August 2018 Letter; IPA
Letter; Putnam Letter; FSI August 2018 Letter; Cetera August 2018
Letter.
---------------------------------------------------------------------------

    Commenters sought additional clarity regarding the scope of a
recommendation and in particular whether certain activities or
communications would constitute recommendations, and requested that the
Commission incorporate or specifically identify exceptions or
exclusions such as the exceptions recognized in FINRA Rule 2111.03
(Suitability) or acknowledged by the DOL.\178\ Some commenters also
sought an explicit carve out or confirmation that certain
communications, such as general education materials, general retirement
planning materials, or general retirement communications, including
``pure distribution recommendations,'' are not ``recommendations''
subject to Regulation Best Interest.\179\
---------------------------------------------------------------------------

    \178\ See, e.g., Prudential Letter; Transamerica August 2018
Letter; SPARK Letter; see also FINRA Rule 2111.03 (excluding the
following communications from the coverage of Rule 2111 as long as
they do not include (standing alone or in combination with other
communications) a recommendation of a particular security or
securities: (a) General financial and investment information,
including: (i) Basic investment concepts, such as risk and return,
diversification, dollar cost averaging, compounded return, and tax
deferred investment, (ii) historic differences in the return of
asset classes (e.g., equities, bonds, or cash) based on standard
market indices, (iii) effects of inflation, (iv) estimates of future
retirement income needs, and (v) assessment of a customer's
investment profile; (b) Descriptive information about an employer-
sponsored retirement or benefit plan, participation in the plan, the
benefits of plan participation, and the investment options available
under the plan; (c) Asset allocation models that are: (i) Based on
generally accepted investment theory, (ii) accompanied by
disclosures of all material facts and assumptions that may affect a
reasonable investor's assessment of the asset allocation model or
any report generated by such model, and (iii) in compliance with
Rule 2214 (Requirements for the Use of Investment Analysis Tools) if
the asset allocation model is an ``investment analysis tool''
covered by Rule 2214; and (d) Interactive investment materials that
incorporate the above).
     The DOL took a similar approach, excluding from the term
``recommendation,'' among other things, general communications and
investment education (including plan information, general financial,
investment and retirement information, asset allocation models and
interactive investment materials). See DOL Interpretative Bulletin
96-1; Participant Investment Education, 29 CFR 2509.96-1, 61 FR
29588 (Jun. 11, 1996) (IB 96-1). See also DOL, Definition of the
Term ``Fiduciary''; Conflict of Interest Rule--Retirement Investment
Advice, 81 FR 20945, 20975 (Apr. 8, 2016) (noting that the now
vacated DOL Fiduciary Rule would have carved out investment
education from the definition of investment advice, incorporating
much of IB 96-1).
    \179\ See SPARK Letter; NAGDCA Letter. Similarly, communications
regarding participation in a plan and communications to make or
increase plan contributions, without more, would generally not come
within ``recommendation.''
---------------------------------------------------------------------------

    The treatment of certain communications as ``education'' rather
than ``recommendations'' is well understood by broker-dealers. We
generally view the following types of communications as not being
recommendations of any securities transaction or investment strategy
involving securities as long as they do not include, standing alone or
in combination with other communications, a recommendation of a
particular security or securities or particular investment strategy
involving securities: \180\
---------------------------------------------------------------------------

    \180\ This concept also applies to investment strategies. See
FINRA Regulatory Notice 11-25, Know Your Customer and Suitability--
New Implementation Date for and Additional Guidance on the
Consolidated FINRA Rules Governing Know-Your-Customer and
Suitability Obligations (May 2011) at FAQ 9 (``It is important to
note, however, that the suitability rule would not apply to a firm's
explanation of a strategy falling outside the safe-harbor provision
if a reasonable person would not view the communication as a
recommendation. Accordingly, the suitability rule would cover a
firm's recommendation that a customer purchase securities using
margin, whereas the rule generally would not cover a firm's brochure
that simply explains the risks and benefits of margin without
suggesting that the customer take action.'').
---------------------------------------------------------------------------

     General financial and investment information, including:
    [cir] Basic investment concepts, such as risk and return,
diversification, dollar cost averaging, compounded return, and tax
deferred investment,
    [cir] historic differences in the return of asset classes (e.g.,
equities, bonds, or cash) based on standard market indices,
    [cir] effects of inflation,
    [cir] estimates of future retirement income needs, and
    [cir] assessment of a customer's investment profile;
     Descriptive information about an employer-sponsored
retirement or benefit plan, participation in the plan, the benefits of
plan participation, and the investment options available under the
plan; \181\
---------------------------------------------------------------------------

    \181\ While this descriptive information would be treated as
``education'' rather than a ``recommendation,'' we caution broker-
dealers to ensure that communications by their associated persons
intended as ``education'' do not cross the line into
``recommendations.'' See FINRA Regulatory Notice 13-45.

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

     Asset allocation models that are:
    [cir] Based on generally accepted investment theory,
    [cir] accompanied by disclosures of all material facts and
assumptions that may affect a reasonable investor's assessment of the
asset allocation model or any report generated by such model, and
    [cir] in compliance with FINRA Rule 2214 (Requirements for the Use
of Investment Analysis Tools) if the asset allocation model is an
``investment analysis tool'' covered by FINRA Rule 2214; \182\ and
---------------------------------------------------------------------------

    \182\ In this regard, as an allocation recommendation becomes
narrower or more specific, the recommendation gets closer to
becoming a recommendation of particular securities and, thus,
subject to the suitability rule. See FINRA Regulatory Notice 12-25
at FAQ 8.
---------------------------------------------------------------------------

     Interactive investment materials that incorporate the
above.
    Thus, for example, a general conversation about retirement
planning, such as providing a company's retirement plan options to a
retail customer, would not, by itself, rise to the level of a
recommendation. Similarly, where a broker-dealer informs a retail
customer that he or she needs to take a required minimum distribution
under the Internal Revenue Code, we would not interpret such
communication, by itself, to rise to the level of a recommendation.
Such a communication would be considered investment education or
descriptive information, provided it does not involve, for example, a
recommendation regarding specific securities to be sold or a
recommendation regarding specific securities to be purchased with the
proceeds of any sale.\183\ We agree with commenters that Regulation
Best Interest should not stifle investment education as a means to
encourage financial wellness, or otherwise restrict broker-dealers from
disseminating information about, for example, retirement plans, and the
approach we are taking to what is or is not considered a
``recommendation'' achieves this goal.\184\
---------------------------------------------------------------------------

    \183\ See, e.g., SPARK Letter (asking for confirmation that
``pure `distribution recommendations' involving retirement accounts,
such as those required under Internal Revenue Code section
401(a)(9), are not a `recommendation of any securities transaction
or investment strategy involving securities.' ''). However,
informing a retail customer about a required minimum distribution
may become a recommendation where a broker-dealer includes (standing
alone or in combination with other communications) a recommendation
of, or regarding, a particular security or securities or an
investment strategy involving securities. See FINRA Rule 2111
(Suitability) FAQ.
    \184\ See SPARK Letter (suggesting expressly excluding
beneficial conversations about retirement savings and ``ensuring
that Regulation Best Interest does not discourage broker-dealers in
any way from having these important conversations with retirement
investors''); see also Transamerica August 2018 Letter (suggesting
the exclusion of various conversations designed to facilitate
retirement savings).
---------------------------------------------------------------------------

b. Interpretation of Any Securities Transaction or Investment Strategy
Involving Securities
    As proposed, Regulation Best Interest would apply to
recommendations of ``any securities transaction'' (purchase, sale, and
exchange) and any ``investment strategy'' involving securities
(including explicit recommendations to hold a security or regarding the
manner in which it is to be purchased or sold). In addition, the
Proposing Release stated that securities transactions or investment
strategies involving securities might also include recommendations to
roll over or transfer assets from one type of account to another, such
as recommendations to roll over or transfer assets from a retirement
plan.\185\ Finally, although we did not propose to cover account type
recommendations generally, we noted that evaluating the appropriateness
of the type of account is an issue that relates to both broker-dealers
and investment advisers, and requested comment on whether and how we
should address this type of recommendation.
---------------------------------------------------------------------------

    \185\ See Proposing Release at 21595.
---------------------------------------------------------------------------

    In response to the Proposing Release, several commenters supported
the Commission's approach; however, several commenters also requested
modifications or clarifications regarding products or strategies
covered under Regulation Best Interest. For example, a majority of the
IAC and numerous commenters highlighted the conflicts of interest
associated with account type recommendations, and urged the Commission
to apply Regulation Best Interest to account type recommendations
generally, and to IRA rollovers.\186\ Relatedly, several commenters
sought clarity regarding whether and when a rollover or account type
recommendation would be a ``recommendation'' under Regulation Best
Interest.\187\
---------------------------------------------------------------------------

    \186\ See, e.g., IAC 2018 Recommendation (supporting the
``expan[sion] of the best interest obligation to cover rollover
recommendations and recommendations by dual registrant firms
regarding account types''); see also NASAA August 2018 Letter; SPARK
Letter; Financial Engines Letter; Cetera August 2018 Letter; AFL-CIO
April 2019 Letter. But see SIFMA August 2018 Letter (viewing
recommendations of an account type as not involving a recommendation
of a securities transaction or investment strategy involving
securities).
    \187\ See, e.g., NAGDCA Letter; FPC Letter.
---------------------------------------------------------------------------

    After careful consideration of comments and feedback, the
Commission has modified the rule text to state that an ``investment
strategy involving securities'' includes ``account recommendations.''
We interpret ``account recommendations'' to include recommendations by
broker-dealers of securities account types generally,\188\ as well as
recommendations to roll over or transfer assets from one type of
account to another (e.g., workplace retirement plan account to an
IRA).\189\ In addition, the Commission is stating its view that ``any
securities transaction or investment strategy involving securities''
not only includes explicit hold recommendations, but also includes
implicit hold recommendations that are the result of agreed-upon
account monitoring between the broker-dealer and retail customer.\190\
---------------------------------------------------------------------------

    \188\ In the discussion of the Care Obligation in Section
II.C.2, we are also setting forth additional positions regarding the
application of the Care Obligation to account type recommendations,
as well as recommendations to roll over or transfer assets from one
account to another. See also Fiduciary Interpretation (explaining
that ``[a]dvice about account type includes advice about whether to
open or invest through a certain type of account (e.g., a
commission-based brokerage account or a fee-based advisory account)
and advice about whether to roll over assets from one account (e.g.,
a retirement account) into a new or existing account that the
adviser or an affiliate of the adviser manages'').
    \189\ A majority of the IAC and numerous commenters expressed
the importance of account rollovers and the need for rollovers to be
covered under Regulation Best Interest. See, e.g., IAC 2018
Recommendation; Financial Engines Letter.
    \190\ Several commenters stated that broker-dealers should be
able to contract with retail customers to provide additional
services, such as account monitoring, and that such agreed upon
services should be subject to Regulation Best Interest. See, e.g.,
NAIFA Letter; IAA August 2018 Letter; AFL-CIO April 2019 Letter.
---------------------------------------------------------------------------

Account Recommendations
    The Proposing Release indicated that securities transactions or
investment strategies involving securities could include
recommendations to roll over or transfer assets from one type of
account to another, such as recommendations to roll over or transfer
assets in a workplace retirement plan account to an IRA, and requested
comment on whether and how to address account type recommendations.
    Several commenters suggested expanding Regulation Best Interest to
explicitly cover rollover recommendations and recommendations by firms
regarding account types. For example, a majority of the IAC explained
that rollover recommendations ``are frequently provided at a critical
juncture in an investor's life--retirement--and are often irrevocable
decisions,'' and further noted that ``[d]ecisions about which type of
account to open have the

potential to greatly affect [retail customers'] costs'' and that both
rollovers and account type recommendations can ``have substantial
potential long-term impacts on investors.'' \191\ Another commenter
noted that ``[r]etirees have no practical ability to recoup lost
spending power by returning to work and setting aside additional
retirement savings, so they are particularly vulnerable to the adverse
consequences of poor advice and high expenses.'' \192\ Finally, a
majority of the IAC and several commenters noted that broker-dealers
and investment advisers alike have a strong economic incentive to
recommend investors roll over plan assets into an IRA or otherwise
transfer assets to open an account with the broker-dealer or investment
adviser.\193\
---------------------------------------------------------------------------

    \191\ IAC 2018 Recommendation. See also Letter from Brian H.
Graff, Executive Director and CEO, Craig P. Hoffman, General
Counsel, Doug Fisher, Director of Retirement Policy, American
Retirement Association (``ARA'') (Dec. 13, 2018) (``ARA December
2018 Letter''); Transamerica August 2018 Letter.
    \192\ Fiduciary Benchmarks Letter.
    \193\ See, e.g., IAC 2018 Recommendation; NASAA August 2018
Letter; Fiduciary Benchmarks Letter.
---------------------------------------------------------------------------

    After consideration of comments received, including concerns
expressed about the conflicts associated with recommendations of
account types, IRA rollovers and retirement advice more broadly, it is
our view that Regulation Best Interest should apply broadly to
recommendations of securities transactions and investment strategies
involving securities. Accordingly, the Commission is including in the
rule text account recommendations as recommendations that will be
covered by Regulation Best. ``Account recommendations'' include
recommendations of securities account types generally (e.g., to open an
IRA or other brokerage account), as well as recommendations to roll
over or transfer assets from one type of account to another (e.g., a
workplace retirement plan account to an IRA).
    Although account recommendations, including recommendations of a
securities account type generally, as well as recommendations to roll
over assets from a workplace retirement plan account to an IRA or to
open an IRA held at the broker-dealer, will almost always involve a
``securities transaction'' (such as a securities purchase, sale, or
exchange), and thus would generally be subject to Regulation Best
Interest, we are modifying the rule text to provide that such
recommendations are ``investment strategies involving securities'' for
purposes of Regulation Best Interest, regardless of whether they are
tied to a specific securities transaction.\194\ Existing broker-dealer
regulation and guidance stresses that the term ``investment strategy''
is to be interpreted broadly, and would include, among others,
recommendations generally to use a bond ladder, day trading,
``liquefied home equity,'' or margin strategy involving securities,
irrespective of whether the recommendations mention particular
securities.\195\ This approach appropriately recognizes that customers
may rely on firms' and associated persons' investment expertise and
knowledge, and therefore the broker-dealer should be responsible for
such recommendations, regardless of whether those recommendations
result in transactions or generate transaction-based compensation.\196\
---------------------------------------------------------------------------

    \194\ A recommendation that a retail customer roll over or
transfer assets to an IRA held at the broker-dealer, or open an IRA
or another securities account with a broker-dealer, presumes that
the recommendation would involve transactions in securities, even if
the rollover or account recommendation does not result in
transactions or transaction-based compensation.
    \195\ See FINRA Rule 2111.03; FINRA Regulatory Notice 12-25 at
Q7.
    \196\ See FINRA Regulatory Notice 11-02, Know Your Customer and
Suitability--SEC Approves Consolidated FINRA Rules Governing Know-
Your-Customer and Suitability Obligations (Jan. 2011).
---------------------------------------------------------------------------

    Account recommendations, including recommendations of securities
account types generally (e.g., to open an IRA or other brokerage
account), and recommendations to roll over or transfer assets into an
IRA or another securities account, are consistent with the types of
recommendations that have been treated as investment strategies under
existing suitability rules.\197\ Specifically, like other investment
strategies, account recommendations are recommendations of an approach
or method (i.e., a ``strategy'') for how a retail customer should
engage in transactions in securities, involve conflicts of interest,
and can have long-term effects on investors' costs and returns from
their investments.\198\ In addition, we believe retail customers rely
on broker-dealers' and associated persons' investment expertise and
knowledge with respect to such recommendations. As a result, such
recommendations must be made consistent with the retail customer's
objectives and needs (i.e., investment profile), irrespective of
whether those recommendations are tied to a specific securities
transaction. Consistent with a majority of the IAC's and other
commenters' suggestions, we are modifying the rule text to state that
the term ``investment strategy involving securities'' includes
``account recommendations,'' which we interpret to include
recommendations of securities account types generally, as well as
recommendations to roll over or transfer assets.\199\
---------------------------------------------------------------------------

    \197\ See supra footnotes 172 and 173.
    \198\ See Capital Group Letter; see also IAC 2018
Recommendation; NASAA August 2018 Letter.
    \199\ See, e.g., IAC 2018 Recommendation; Capital Group Letter
(``Choosing between a brokerage and an advisory account is an
incredibly impactful decision for investors. It is very important
that these recommendations be made in the best interest of the
retail [customer].'').
---------------------------------------------------------------------------

    Thus, such account recommendations will be subject to Regulation
Best Interest even if there is not a recommendation of a securities
transaction. Although we proposed only covering account type
recommendations that are tied to securities transactions, and not
account type recommendations generally, we agree with commenters and a
majority of the IAC that consistent with other investment strategies
involving securities, securities account type recommendations should be
covered under Regulation Best Interest regardless of whether those
recommendations result in transactions or generate transaction-based
compensation.\200\ In addition, as discussed in the Fiduciary
Interpretation, investment advisers' fiduciary duty applies to advice
to clients about account types, which satisfies the concerns about
parity set forth in the Proposing Release and protects retail customers
of broker-dealers and retail clients of investment advisers alike.\201\
---------------------------------------------------------------------------

    \200\ See, e.g., IAC 2018 Recommendation; NASAA August 2018
Letter.
    \201\ See Fiduciary Interpretation.
---------------------------------------------------------------------------

    Where a financial professional who is dually registered (i.e., an
associated person of a broker-dealer and a supervised person of an
investment adviser (regardless of whether the professional works for a
dual-registrant, affiliated firm, or unaffiliated firm)) is making an
account recommendation to a retail customer,\202\ whether Regulation
Best Interest or the Advisers Act will apply will depend on the
capacity in which the financial professional making

the recommendation is acting.\203\ As discussed further in the Care
Obligation, if the individual is acting as a broker-dealer or
associated person thereof, he or she must comply with Regulation Best
Interest and will need to take into consideration all types of accounts
offered by the financial professional (i.e., both brokerage and
advisory accounts) when making the recommendation of an account that is
in the retail customer's best interest.
---------------------------------------------------------------------------

    \202\ As discussed in more detail below in Section II.B.3.b,
Regulation Best Interest applies to a retail customer who receives a
recommendation and uses the recommendation. Among other things, we
interpret a retail customer to use a recommendation when: (1) The
retail customer opens a brokerage account with the broker-dealer,
regardless of whether the broker-dealer receives compensation; (2)
the retail customer has an existing account with the broker-dealer
and receives a recommendation from the broker-dealer, regardless of
whether the broker-dealer receives or will receive compensation,
directly or indirectly, as a result of that recommendation; or (3)
the broker-dealer receives or will receive compensation, directly or
indirectly as a result of that recommendation, even if that retail
customer does not have an account at the firm.
    \203\ See Section II.B.3.d, below for discussion of factors the
Commission will consider in determining capacity. See also Fiduciary
Interpretation at footnotes 42-44 and accompanying text. As
discussed in the Fiduciary Interpretation, while advice to
prospective clients about these matters is subject to the antifraud
provisions under section 206 of the Advisers Act, the adviser must
also satisfy its fiduciary duty with respect to any such advice
(e.g., regarding account type) once a prospective client becomes a
client. Thus, at the point in time at which the prospective client
becomes a client of the investment adviser (e.g., at account
opening), the fiduciary duty applies. Id.
---------------------------------------------------------------------------

    In the case of an account recommendation by a financial
professional who is only registered as an associated person of broker-
dealer (regardless of whether that broker-dealer entity is a dual-
registrant or affiliated with an investment adviser), Regulation Best
Interest will apply to the recommendation. Further, the associated
person can only recommend a brokerage account that the broker-dealer
offers when the associated person has a reasonable basis to believe
that the recommended brokerage account is in the best interest of the
retail customer and the broker-dealer otherwise complies with
Regulation Best Interest.
    Regulation Best Interest would apply to account recommendations by
the dual-registrant firm, and consistent with the Conflict of Interest
Obligation, the firm would need to, among other things, establish,
maintain and enforce policies and procedures to identify, disclose, and
mitigate, any incentives for an associated person of the broker-dealer
to place the interest of the firm or the associated person ahead of the
interests of the retail customer.
    In the discussion of the Care Obligation below, we discuss how a
broker-dealer and associated persons of a broker-dealer can make
recommendations of securities account types, including recommendations
to open an IRA or to roll over assets into an IRA, in the best interest
of the retail customer.
Hold Recommendations
    The Proposing Release stated that Regulation Best Interest would
apply to any securities transaction or investment strategy involving
securities, including explicit recommendations to hold a security or
regarding the manner in which it is to be purchased or sold to retail
customers.\204\ The Proposing Release also recognized that broker-
dealers may agree with a retail customer by contract to take on
additional obligations beyond those imposed by Regulation Best
Interest, for example, by agreeing with a retail customer to provide
periodic or ongoing services, such as ongoing monitoring of the retail
customer's investments for purposes of recommending changes in
investments.\205\ To the extent that a broker-dealer takes on such
additional obligations, the Proposing Release indicated that Regulation
Best Interest would apply to any recommendations about securities or
investment strategies involving securities made to retail customers
resulting from such services.
---------------------------------------------------------------------------

    \204\ Proposing Release at 21593-21595.
    \205\ Id. We also asked whether broker-dealers who provide
ongoing monitoring should be considered investment advisers. Id. at
21592.
---------------------------------------------------------------------------

    Several commenters agreed that broker-dealers should be able to
contract with retail customers for additional services and be able to
expand the relationship on their own terms, while other commenters
recommended that a duty to monitor apply to broker-dealers depending on
the facts and circumstances.\206\ Other commenters suggested that the
Commission not impose a duty to monitor brokerage accounts.\207\
---------------------------------------------------------------------------

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

    We are confirming that, consistent with existing broker-dealer
regulation, Regulation Best Interest will apply to explicit
recommendations to hold a security or securities.\208\ We are also
confirming that Regulation Best Interest does not impose a duty to
monitor a retail customer's account. We agree, however, with commenters
that Regulation Best Interest should apply to any recommendations that
result from the account monitoring services that a broker-dealer agrees
to provide.\209\ We believe that any monitoring service agreed to by
the broker-dealer, the scope and frequency of which would be required
to be disclosed pursuant to the Disclosure Obligation, would be covered
by Regulation Best Interest, as these activities will result in a
recommendation to purchase, sell, or hold a security, or the manner in
which to purchase, sell, or hold a security, at each time the agreed-
upon monitoring occurs.\210\ Thus, by agreeing to perform account
monitoring services, the broker-dealer is taking on an obligation to
review and make recommendations with respect to that account (e.g., to
buy, sell or hold) on that specified, periodic basis.\211\ For example,
if a broker-dealer agrees to monitor the retail customer's account on a
quarterly basis, the quarterly review and each resulting recommendation
to purchase, sell, or hold, will be a recommendation subject to
Regulation Best Interest. This is the case even in instances where the
broker-dealer does not communicate any recommendation to the retail
customer. We believe that such an ``implicit'' recommendation to hold
in this context should be covered under Regulation Best Interest in
addition to ``explicit'' recommendations to hold.\212\
---------------------------------------------------------------------------

    \208\ See FINRA Regulatory Notice 12-25.
    \209\ See NAIFA Letter; IAA August 2018 Letter.
    \210\ In agreeing to provide any account monitoring services,
broker-dealers need to consider whether the monitoring services fit
within the broker-dealer exclusion from the Advisers Act. See Solely
Incidental Interpretation.
    \211\ The broker-dealer would also be required to disclose the
existence, scope, and frequency of such account monitoring services
pursuant to the Disclosure Obligation. To avoid ambiguity over
whether or when an implicit hold recommendation has been made, this
disclosure should identify with specificity when the agreed upon
monitoring will occur.
    \212\ See FINRA Rule 2111.03 (noting ``[t]he phrase `investment
strategy involving a security or securities' used in this Rule is to
be interpreted broadly and would include, among other things, an
explicit recommendation to hold a security or securities.''); see
also NASAA August 2018 Letter.
---------------------------------------------------------------------------

    This position differs from FINRA guidance, which generally states
that the FINRA suitability rule does not cover an implicit
recommendation to hold.\213\ We believe that ``implicit'' hold

recommendations in this context, where the broker-dealer agrees to
provide specified account monitoring services, are similar to explicit
hold recommendations that are considered ``investment strategies''
because they would constitute the type of recommendations that retail
customers would be expected to rely upon and would be a ``call to
action'' in the sense of a recommendation that the customer stay the
course.\214\ We believe that, in this context, silence is tantamount to
an explicit recommendation to hold, and should be viewed as a
recommendation to hold the securities for purposes of Regulation Best
Interest.\215\ Our interpretation that the term ``investment strategy
involving securities'' includes implicit recommendations to hold that
result from an agreement to monitor, at the time the agreed-upon
monitoring occurs, is generally consistent with the treatment of
similar broker-dealer communications as ``investment strategies,'' and
applies the Regulation Best Interest protections to retail customers
relying on a broker-dealer's agreement to monitor the customer's
account.\216\
---------------------------------------------------------------------------

    \213\ FINRA Regulatory Notice 11-25 at Q7 (``The rule, for
instance, would not apply where an associated person remains silent
regarding, or refrains from recommending the sale of, securities
held in an account. That is true regardless of whether the
associated person previously recommended the purchase of the
securities, the customer purchased them without a recommendation, or
the customer transferred them into the account from another firm
where the same or a different associated person had handled the
account.''). See also id. at footnote 21 (``To the extent that a
customer account at a broker-dealer can be discretionary under
applicable federal securities laws, the suitability rule generally
would not apply where a firm refrains from selling a security. The
rule states that it applies to explicit recommendations to hold.
Unless the facts indicate that an associated person's failure to
sell securities in a discretionary account was intended as or
tantamount to an explicit recommendation to hold, FINRA would not
view the associated person's inaction or silence in such
circumstances as a recommendation to hold the securities for
purposes of the suitability rule.'').
    \214\ See FINRA Regulatory Notice 11-25 at Q7 (``The rule would
apply, for example, when an associated person meets with a customer
during a quarterly or annual investment review and explicitly
advises the customer not to sell any securities in or make any
changes to the account or portfolio.''). While the FINRA guidance
goes on to state that the rule generally would not cover an implicit
recommendation to hold, it does not address the particular scenario
in which a broker-dealer agrees to monitor an account (such as a
quarterly review) and discloses the terms of that monitoring, and
then during that review is silent on whether the customer should
make any changes. Id.; see also FINRA Regulatory Notice 12-25 at Q3
and accompanying footnotes.
    \215\ See FINRA Regulatory Notice 11-25 at footnote 21.
    \216\ Our interpretation is generally consistent with a majority
of the IAC's and other commenters' views regarding application of
Regulation Best Interest to implicit hold recommendations in the
context of agreed-upon account monitoring services. See IAC 2018
Recommendation (``We believe the best interest standard should be
applied to the broker-dealer's monitoring of the customer account,
where brokers provide ongoing services to the account. In essence,
this would apply the best interest standard to the implicit ``no
recommendation'' recommendation that a broker makes when reviewing
the account and recommends no change.''); NAIFA Letter (asserting
broker-dealers should be free to agree to, and define the nature of,
any ongoing relationship via contract, such as including monitoring
services); AFL-CIO April 2019 Letter.
---------------------------------------------------------------------------

    Although for purposes of Regulation Best Interest, implicit hold
recommendations will be considered a recommendation of ``any securities
transaction or investment strategy regarding securities'' where a
broker-dealer has agreed to provide account monitoring services, we are
not otherwise changing the treatment of implicit hold recommendations
in other contexts. In other words, unless the broker-dealer has agreed
to provide account monitoring services as described, Regulation Best
Interest would only apply to explicit--and not to implicit--hold
recommendations regarding security positions in an account.\217\ This
is consistent with the fact that Regulation Best Interest would not
impose a duty to monitor customer accounts.\218\
---------------------------------------------------------------------------

    \217\ FINRA Notice to Members 11-25 at Q7.
    \218\ Our approach does not require broker-dealers to undertake
account monitoring, unless they choose to do so. See Solely
Incidental Interpretation.
---------------------------------------------------------------------------

    Finally, although certain commenters stated that account monitoring
services should only be performed by investment advisers,\219\ we
reiterate that Regulation Best Interest does not change the scope of
account monitoring that broker-dealers may agree to provide, nor does
it change the scope of activities that would come within the ``solely
incidental'' prong of the broker-dealer exclusion to the definition of
``investment adviser'' in the Advisers Act. We recognize that a broker-
dealer may voluntarily, and without any agreement with the customer,
review the holdings in a retail customer's account for the purpose of
determining whether to provide a recommendation to the customer. We
view this voluntary review--and any subsequent recommendation to the
customer--as in connection with and reasonably related to the broker-
dealer's primary business of effecting securities transactions.\220\
---------------------------------------------------------------------------

    \219\ See, e.g., NASAA August 2018 Letter; FPC Letter.
    \220\ See Solely Incidental Interpretation. Absent an agreement
with the customer (which would be required to be disclosed pursuant
to the Disclosure Obligation), we do not consider this voluntary
review to be ``account monitoring'' nor would it in itself create an
obligation under Regulation Best Interest, provided of course that
any recommendation made to the customer as a result of any such
voluntary review would be subject to Regulation Best Interest.
---------------------------------------------------------------------------

Recommendations Involving Retirement Accounts
    Furthermore, based on comments, our position is that
recommendations to retail customers regarding retirement accounts would
also be subject to Regulation Best Interest where they involve
securities transactions or investment strategies involving securities.
We agree with commenters that recommendations to retail customers to
take distributions from proceeds of specific securities or to take in-
service loans from an employer-sponsored plan are recommendations of a
securities transaction, as they would involve a recommendation to sell
a security.\221\ However, while such recommendations to take plan
distributions are ``recommendations'' and thereby subject to Regulation
Best Interest, we reiterate that general communications by broker-
dealers relating to distributions in the context of a required minimum
distribution or education regarding a plan's options would not, by
themselves, constitute recommendations that would be subject to
Regulation Best Interest.\222\
---------------------------------------------------------------------------

    \221\ See supra footnotes 185-189 and accompanying text. See,
e.g., NASAA August 2018 Letter; Fiduciary Benchmarks Letter; IAC
2018 Recommendation.
    \222\ For example, where a broker-dealer informs a retail
customer that based on age and other relevant factors, he or she
needs to take a required minimum distribution, but does not
otherwise recommend specifics, such as what securities to sell, or
where to place the proceeds, the communication would generally not
be a ``recommendation'' subject to Regulation Best Interest. As with
other communications subject to broker-dealer regulation, an inquiry
of whether a ``recommendation'' was made would depend on the facts
and circumstances relating to the communication, as discussed more
fully above. See supra Section II.B.2.a.
---------------------------------------------------------------------------

3. Retail Customer
    We proposed to define retail customer as: ``a person, or the legal
representative of such person, who: (1) Receives a recommendation of
any securities transaction or investment strategy involving securities
from a broker, dealer, or a natural person who is an associated person
of a broker or dealer, and (2) uses the recommendation primarily for
personal, family or household purposes.'' \223\ The definition was
generally intended to track the definition of ``retail customer'' under
Section 913(a) of the Dodd-Frank Act with some differences, as
described in the Proposing Release.\224\
---------------------------------------------------------------------------

    \223\ As we stated in the Proposing Release, we believe that
broker-dealers would generally be required to obtain sufficient
facts about a customer to determine an account's primary purpose for
purposes of Regulation Best Interest. See Proposing Release at
21595.
    \224\ See Proposing Release at Section II.C.4. Section 913(a)
defines ``retail customer'' as a natural person, or the legal
representative of such natural person who: (1) Receives personalized
investment advice about securities from a broker or dealer or
investment adviser; and (2) uses such advice primarily for personal,
family, or household purposes.
---------------------------------------------------------------------------

    In proposing the definition, we intended to exclude recommendations

related to commercial or business purposes but for the definition to
remain sufficiently broad to capture recommendations related to the
various reasons retail customers may invest, such as saving for
retirement, education expenses and other savings purposes. As such, the
proposed definition applied to any persons who receive a recommendation
from a broker or dealer or a natural person who is an associated person
of a broker or dealer, provided that the recommendation is primarily
for personal, family or household purposes. In the case of dual-
registrants, the proposed definition was intended to apply only to
recommendations made by broker-dealers in their brokerage capacity,
based on a facts and circumstances analysis and consistent with
existing guidance.\225\ The proposed definition differed from the
definition of ``retail investor'' in the Relationship Summary Proposal
as the Relationship Summary was intended for a broader range of
investors.\226\
---------------------------------------------------------------------------

    \225\ Id.
    \226\ Id.
---------------------------------------------------------------------------

    The Commission requested comment on the scope and definition of
retail customer and received a range of comments requesting:
modification of the definition to focus on natural persons;
clarification of the ``personal, family or household purposes''
qualification; harmonization with the definition in Form CRS; and
further guidance surrounding the treatment of dual-registrants. In
consideration of the comments received, the Commission is modifying the
definition of ``retail customer'' to mean a natural person, or the
legal representative of such natural person, who: (A) Receives a
recommendation of any securities transaction or investment strategy
involving securities from a broker, dealer, or a natural person who is
an associated person of a broker or dealer; and (B) uses the
recommendation primarily for personal, family, or household purposes.
    The revised definition shifts the focus to natural persons, as
opposed to any persons, but otherwise it is adopted largely as
proposed. However, as discussed below, the Commission is providing
additional interpretations, guidance and clarification regarding: The
interpretation of the ``personal, family, or household purposes''
qualifier; the interaction of this definition with the definition of
``retail investor'' in Form CRS; what it means for a retail customer to
``use'' the recommendation; and the status of dual-registrants.
Furthermore, we are providing guidance on who would be considered to be
the legal representative of a natural person for purposes of this
definition.
a. Focus on Natural Persons and Legal Representatives of Natural
Persons
    The Commission proposed to extend the definition of ``retail
customer'' in Regulation Best Interest beyond natural persons to any
persons to cover non-natural persons (e.g., trusts that represent the
assets of a natural person), which the Commission stated it believed
would benefit from the protections of Regulation Best Interest.
    Commenters generally suggested that the definition of retail
customer be modified to focus on natural persons.\227\ To that end, a
number of commenters suggested eliminating the ``personal, family or
household purposes'' qualifier from the definition under Dodd-Frank
Section 913.\228\ Many commenters suggested excluding institutional
investors and professional advisers or fiduciaries, including
retirement plan representatives \229\ and family offices,\230\ while a
few stated that non-professional plan fiduciaries should have the same
protections as retail customers.\231\ Many commenters suggested
harmonizing the definition with FINRA's definition,\232\ in particular,
by excluding: (1) Institutional accounts that would be exempted from
certain suitability protections under FINRA Rule 2111 (Suitability)
\233\ or (2) institutional investors as defined in Rule 2210
(Communications with the Public),\234\ which is broader \235\ and would
include, among others, certain workplace retirement plans. Conversely,
a few commenters believed that Regulation Best Interest should apply to
both retail and institutional customers.\236\
---------------------------------------------------------------------------

    \227\ See, e.g., Cetera August 2018 Letter; Invesco Letter.
    \228\ See FPC Letter; SIFMA August 2018 Letter; BlackRock
Letter. Contra ACLI Letter (supporting the provision in Section 913
and positing that Regulation Best Interest appropriately implements
this foundational threshold).
    \229\ See, e.g., SIFMA August 2018 Letter; Vanguard Letter;
Prudential Letter; ICI Letter; Fidelity Letter.
    \230\ See, e.g., TIAA Letter; SIFMA August 2018 Letter; Letter
from Stuart J. Kaswell, Executive Vice President and Managing
Director, Managed Funds Association, and Jiri Krol, Deputy CEO,
Global Head of Government Affairs, Alternative Investment Management
Association (Aug. 7, 2018) (``Managed Funds Association Letter'').
    \231\ ARA August 2018 Letter; CFA August 2018 Letter.
    \232\ See, e.g., UBS Letter; Bank of America Letter; Raymond
James Letter; TIAA Letter; Letter from Joseph Giovanniello,
Ladenburg Thalmann Financial Services Inc. (Jul. 30, 2018)
(``Ladenburg Letter'').
    \233\ FINRA Rule 2111(b). Institutional accounts include banks,
savings and loan associations, insurance companies, registered
investment companies, state and Federal Registered investment
advisers, and other persons with total assets of at least $50
million.
    \234\ FINRA Rule 2210(a)(4). Institutional investors include, in
addition to persons with institutional accounts, government entities
and their subdivisions, employee benefit plans, qualified plans as
defined in Exchange Act Section 3(a)(12)(C), broker-dealers and
registered representatives, and persons acting solely on behalf of
such institutional investors.
    \235\ See, e.g., SIFMA August 2018 Letter; TIAA Letter; IPA
Letter.
    \236\ NASAA August 2018 Letter, Better Markets August 2018
Letter; FPC Letter. But see Managed Funds Association Letter
(suggesting that sophisticated investors should not be treated as
retail customers).
---------------------------------------------------------------------------

    In response to comments, we are modifying the definition to focus
on natural persons and their legal representatives, and are clarifying
that we interpret ``legal representatives'' to mean non-professional
legal representatives of a natural person, as we discuss below. We
believe this change and clarification provides more certainty that
institutions and certain professional fiduciaries are not covered for
purposes of Regulation Best Interest. It would also retain, however,
coverage of certain legal entities (i.e., trusts that represent the
assets of a natural person) specifically identified in the Proposing
Release as ``retail customers'' within the scope of Regulation Best
Interest, but would not exclude certain high-net-worth natural persons,
as was suggested by some commenters \237\ to match the current FINRA
exclusion of such natural persons from customer-specific suitability
requirements.\238\
---------------------------------------------------------------------------

    \237\ See, e.g., Morgan Stanley Letter; FSI August 2018 Letter.
    \238\ See FINRA Rule 4512(c), which includes within the
definition of ``institutional account'' any person (whether a
natural person, corporation, partnership, trust or otherwise) with
total assets of at least $50 million. Currently, under FINRA rules,
broker-dealers are exempt from the customer-specific suitability
obligations with respect to these ``institutional accounts'' if
certain conditions are met. FINRA Rule 2111(b).
---------------------------------------------------------------------------

    While the Commission recognizes commenters' concerns regarding
compliance costs and burdens if the definition of retail customer does
not align with FINRA's exclusion of certain institutional accounts and
institutional investors, we have decided not to align our definition
with FINRA's exclusion because we believe conflicted recommendations
can also result in harm to high net-worth individuals.\239\

We believe the benefits of Regulation Best Interest justify compliance
costs as these individuals could benefit from the protections included
in Regulation Best Interest regardless of their net worth, which may
not necessarily correlate to a particular level of financial
sophistication.\240\
---------------------------------------------------------------------------

    \239\ The Commission has brought numerous enforcement actions
against financial professionals engaged in schemes to defraud
certain high net-worth individuals, in particular, professional
athletes. See, e.g. SEC v. Charles A. Banks, IV, Civil Action No.
16-CV-3399-TWT (N.D. Ga. Nov. 2, 2018) (former investment adviser
who fraudulently induced a former professional athlete to invest
$7.5 million in a sports team and apparel merchandise company based
on a series of misrepresentations); SEC v. Ash Narayan, The Ticket
Reserve Inc. a/k/a Forward Market Media, Inc., Richard M. Harmon,
and John A. Kaptrosky, Civil Action No. 16-CV-1417-M (N.D. Tex. May
24, 2016) (investment adviser who misappropriated millions of
dollars from accounts he managed for professional athletes and
invested them in online sports and entertainment ticket business on
whose board he served).
    In addition, reports indicate deficiencies in financial literary
among the general population of retail investors. See Federal
Research Division, Library of Congress, Financial Literacy Among
Retail Investors in the United States (Dec. 30, 2011) at 25,
available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part2.pdf (``Library of Congress Report'').
    \240\ See Primerica Letter (noting challenges in using wealth
and education as proxies for investment sophistication).
    In addition, the definition of ``retail customer'' under Section
913(a) of the Dodd-Frank Act did not make a distinction based on net
worth.
---------------------------------------------------------------------------

    In addition, we view a ``legal representative'' of a natural person
to only cover non-professional legal representatives (e.g., a non-
professional trustee that represents the assets of a natural person and
similar representatives such as executors, conservators, and persons
holding a power of attorney for a natural person),\241\ thereby
excluding certain institutions from Regulation Best Interest's
coverage. In capturing non-professional legal representatives within
the definition of retail customer, we are providing the protections of
Regulation Best Interest to non-professional persons who are acting on
behalf of natural persons but who are not regulated financial services
industry professionals retained by natural persons to exercise
independent professional judgment, such as registered investment
advisers and broker-dealers, corporate fiduciaries (e.g., banks, trust
companies and similar financial institutions) and insurance companies,
and the employees or other regulated representatives of such advisers,
broker-dealers, corporate fiduciaries and insurance companies.\242\ Our
definition is intended to capture natural persons and their legal
representatives who rely directly on the broker-dealer for the
recommendation. Accordingly, such non-professional legal
representatives would not include regulated financial industry
professionals. We believe this responds to commenters who stated that
it should not be necessary to provide the protections of Regulation
Best Interest to regulated professionals.\243\ Importantly, however,
this will not relieve firms or financial professionals retained to
represent the assets of natural persons from their own obligations to
retail customers.\244\
---------------------------------------------------------------------------

    \241\ A non-professional legal representative is covered
pursuant to this rule even if another person is a trustee or
managing agent of the trust.
    \242\ See also Relationship Summary Adopting Release.
    \243\ See, e.g., Bank of America Letter; Invesco Letter; Letter
from Bob Grohowski, Senior Legal Counsel, and Jon Siegel, Senior
Legal Counsel, T. Rowe Price (Aug. 10, 2018) (``T. Rowe Letter'');
Oppenheimer Letter; ICI Letter.
    \244\ See also Relationship Summary Adopting Release.
---------------------------------------------------------------------------

    We retained the ``personal, family, or household purposes''
qualifier,\245\ but are providing additional guidance and clarification
on our interpretation of this phrase to address comments received. In
particular, we interpret ``personal, family or household purposes'' to
mean that any recommendation to a natural person for his or her account
would be subject to Regulation Best Interest, other than
recommendations to natural persons seeking these services for
commercial or business purposes. Accordingly, under this
interpretation, ``personal, family or household purposes'' would not
include, for example, an employee seeking services for an employer or
an individual who is seeking services for a small business or on behalf
of another non-natural person entity such as a charitable trust.\246\
As discussed above \247\ and pursuant to the Care Obligation,\248\ we
believe broker-dealers are able to obtain sufficient facts to determine
the purpose for which a recommendation will be used.
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    \245\ Regulation Best Interest relies in part on the statutory
authority provided in Section 913 of the Dodd-Frank Act which
includes the statutory definition of ``retail customer.'' See
Section 913(a) of the Dodd-Frank Act.
    \246\ As discussed below, to the extent a plan representative
who decides service arrangements for a workplace retirement plan is
a sole proprietor or other self-employed individual who will
participate in the plan, the plan representative will be a retail
customer to the extent that the sole proprietor or self-employed
individual receives recommendations directly from a broker-dealer
primarily for personal, family or household purposes.
    \247\ See supra footnote 223 and accompanying text.
    \248\ Pursuant to the Care Obligation, a broker-dealer is
required to ascertain the customer's investment profile which
considers, among other things, financial situation and needs and
investment objectives, in evaluating a recommendation and whether it
is in a retail customer's best interest.
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    We also confirm that ``personal, family or household purposes''
would cover retirement accounts, as retirement savings is a personal,
household or family purpose. Accordingly, the definition of retail
customer will include a natural person receiving recommendations \249\
for his or her own retirement account, including but not limited to
IRAs and individual accounts in workplace retirement plans, such as
401(k) plans and other tax-favored retirement plans.\250\ For example,
plan participants receiving recommendations about whether to take a
distribution from a 401(k) plan or other workplace retirement plan and
how to invest that distribution would be covered as retail customers.
Similarly, a plan participant receiving recommendations for the
participant's individual account held in a 401(k) plan or other
workplace retirement plan would be a retail customer for purposes of
Regulation Best Interest.\251\
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    \249\ See Section II.C.2 (describing what constitutes a
``recommendation'' for purposes of Regulation Best Interest).
    \250\ Such IRAs include, for example, individual retirement
accounts and individual retirement annuities described by Internal
Revenue Code section 408(a) and (b), ``simplified employee
pensions'' (SEPs) described by Code section 408(k), and simple
retirement accounts described by Code section 408(p) (SIMPLE IRAs).
In response to commenters, we also clarify that workplace retirement
plans include any arrangement available at a workplace that provides
retirement benefits or allows saving for retirement, including, for
example, any 401(k) plans or other plan that meet requirements for
qualification under Code section 401(a), deferred compensation plans
of state and local governments and tax-exempt organizations
described by Code section 457, and annuity contracts and custodial
accounts described by Code section 403(b). Likewise, the definition
of retail investor includes natural persons seeking brokerage or
advisory services for other tax-favored savings arrangements such as
an Archer Medical Savings Account described by Code section 220(d),
a Health Savings Accounts described by Code section 223(d) and any
similar tax-favored health plan saving arrangement, a Coverdell
education savings account described by Code section 530 and a
qualified tuition program or ``529 plan'' established pursuant to
Code section 529.
    \251\ For example, we understand that, although not common, some
401(k) plans and other individual account plans provide participants
total discretion to choose a broker-dealer to provide services for
their individual plan account. See, e.g., 29 CFR 2550. 404c-1(f),
Example 9.
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    The Commission acknowledges concerns from some commenters that
workplace retirement plans and their representatives (e.g., plan
sponsors, trustees, other fiduciaries) and service providers should be
included in the definition of retail customer.\252\ However, we
understand that plan representatives of workplace retirement plans
typically are not receiving recommendations for their own account for
personal, family or household purposes when they engage a broker-dealer
to provide services to a retirement plan established, maintained,

and operated by an employer to provide pension or retirement savings
benefits to employees; and further, as a legal representative of a plan
participant, must comply with DOL rules.\253\ As such, the Commission
does not believe that workplace retirement plans or their
representatives and service providers generally fall within the
definition of retail customer for purposes of Regulation Best Interest
because the workplace retirement plan is not a natural person, and
therefore the workplace retirement plan representatives are not a non-
professional representative of a natural person that is receiving a
recommendation directly from a broker-dealer for ``personal, family, or
household purposes.'' \254\
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    \252\ See, e.g., ARA December 2018 Letter; FPC Letter. But see
Empower Letter (``It would be helpful if the SEC could confirm that
the definition of `retail customer' under RBI does not include
advice to managers of retirement plans or to their fiduciaries or
representatives.'').
    \253\ It is our understanding that the investment
responsibilities of plan representatives typically include, among
other things, selecting and monitoring a menu of plan investment
options and designating and monitoring ``default'' investments for
investing account balances of participants who do not make their own
investment elections, and that plan representatives typically make
these investment selections for a workforce with diverse investment
profiles. See ARA December 2018 Letter (describing obligations of
plan fiduciaries selecting an investment menu and qualified default
investment alternatives); Empower Letter (describing plan fiduciary
obligations to select investment menus). We also understand that
plan representatives may receive brokerage and advice services for
plans together with or complimentary with, other services supporting
the plan's establishment, maintenance and operation, such as plan
design, recordkeeping and other administrative services. See, e.g.,
Groom Letter (describing business models of firms offering brokerage
and advice services together with other services); SPARK Letter
(same). In this context, a plan representative would not be
receiving recommendations from a broker-dealer for his or her own
account and considerations material to the plan representative's
investment decisions differ from a situation in which a retail
customer receives a recommendation from a broker-dealer for his or
her own account.
    Further, we note that DOL has rules currently in place (not
affected by the Fifth Circuit's decision vacating the DOL Fiduciary
Rule) that address how plan representatives operate participant-
directed plans and select investment menus for such plans, see 29
CFR 2550.404c-1, what actions, including disclosures, plan
representatives must take to be able to raise a defense or claim for
investment losses by a participant or beneficiaries, see 29 CFR
2550.404c-5, and also generally require broker-dealers making
investment alternatives available for a participant-directed plan to
disclose in writing (among other things) all direct and indirect
compensation received in connection with providing plan services.
See 29 CFR 2550.408b-2(c). See also Form 5500, Schedule C, requiring
after-the-fact reporting by certain plans of information regarding
direct and indirect compensation received by, among others, broker-
dealers and investment advisers, in connection with services
rendered or their position with the plan.
    Accordingly, we agree with those commenters who recommended that
plan representatives should not be included in the definition of
retail customer. See Empower Letter; Groom Letter; Letter from Nora
M. Everett, President, Retirement and Income Solutions, Principal
Financial Group (Aug. 7, 2018) (``Principal Letter''); SPARK Letter;
T. Rowe Price Letter; Transamerica August 2018 Letter.
    \254\ Although workplace retirement plans are not generally
covered by the definition of retail customer in by Regulation Best
Interest, based on preliminary discussions with DOL staff, we
understand that the DOL is considering regulatory options in light
of the Fifth Circuit's decision vacating the DOL Fiduciary Rule,
including the types of protections available to such workplace
retirement plans and their representatives. Department of Labor
Regulatory Agenda, Fiduciary Rule and Prohibited Transaction
Exemptions, Fall 2018, available at https://www.reginfo.gov/public/do/eAgendaViewRule?pubId=201810&RIN=1210-AB82.
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    We note, however, that some plan representatives may participate
under their employer's workplace plan, for example, in the case of a
workplace IRA or other workplace retirement plan that is established
and maintained by a sole proprietor or other self-employed individual
that includes one or more employees in addition to the plan
representative. To the extent that a plan representative who decides
service arrangements for a workplace retirement plan is a sole
proprietor or other self-employed individual who will participate in
the plan, the plan representative would be a retail customer for
purposes of Regulation Best Interest to the extent the sole proprietor
or self-employed individual receives recommendations directly from a
broker-dealer primarily for personal, family or household purposes.
b. Retail Customer Use of the Recommendation
    In the Proposing Release, the Commission did not specifically
address whether recommendations subject to Regulation Best Interest
needed to be for compensation, but did state that the proposed
definition of retail customer would only apply to a person who
``received a recommendation . . . from a broker or dealer or a natural
person who is an associated person of a broker or dealer, and used the
recommendation primarily for personal, family, or household purposes.''
We stated that this approach was appropriate because it builds upon the
guidance provided for FINRA's suitability rule.\255\ In response, a few
commenters recommended that the Commission limit the application of
Regulation Best Interest to recommendations made to retail customers
for compensation.\256\
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    \255\ See Proposing Release at 21596, footnote 160.
    \256\ See Morgan Stanley Letter; CCMC Letters.
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    Regulation Best Interest applies to a retail customer that both
receives a recommendation of any securities transaction or investment
strategy involving securities by a broker-dealer and that uses that
recommendation primarily for personal, family, or household purposes,
and not simply those recommendations for which a broker-dealer receives
compensation.\257\ In response to commenters, we interpret that a
retail customer ``uses'' a recommendation of a securities transaction
or investment strategy involving securities when, as a result of the
recommendation: (1) The retail customer opens a brokerage account with
the broker-dealer, regardless of whether the broker-dealer receives
compensation,\258\ (2) the retail customer has an existing account with
the broker-dealer and receives a recommendation from the broker-dealer,
regardless of whether the broker-dealer receives or will receive
compensation, directly or indirectly, as a result of that
recommendation, or (3) the broker-dealer receives or will receive
compensation, directly or indirectly as a result of that
recommendation, even if that retail customer does not have an account
at the firm.\259\
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    \257\ See paragraph (b)(1) of Regulation Best Interest.
    \258\ As discussed in Section II.B.2.b below, account
recommendations, including recommendations of a securities account
type generally, and recommendations to open an IRA or to roll over
or transfer assets into an IRA, are covered by Regulation Best
Interest regardless of whether those recommendations result in
transactions or generate transaction-based compensation.
    \259\ See Proposing Release at 21596, footnote 160 and
accompanying text. See also FINRA Regulatory Notice 12-55,
Suitability--Guidance on FINRA's Suitability Rule (Dec. 2012) at
Q6(b) (``The suitability rule would apply when a broker-dealer or
registered representative makes a recommendation to a potential
investor who then becomes a customer. Where, for example, a
registered representative makes a recommendation to purchase a
security to a potential investor, the suitability rule would apply
to the recommendation if that individual executes the transaction
through the broker-dealer with which the registered representative
is associated or the broker-dealer receives or will receive,
directly or indirectly, compensation as a result of the recommended
transaction.''); NASD Notice to Members 04-72, Transfers of Mutual
Funds and Variable Annuities--Impermissible Use of Negative Response
Letters for the Transfer of Mutual Funds and Variable Annuities
(Changes in Broker-Dealer of Record) (Oct. 2004).
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    When a retail customer opens or has an existing account with a
broker-dealer the retail customer has a relationship with the broker-
dealer and is therefore in a position to ``use'' (i.e., accept or
reject) the broker-dealer's recommendation. In this context, tying
``use'' solely to a broker-dealer's receipt of compensation would
inappropriately result in Regulation Best Interest not applying to the
broker-dealer's recommendations to hold securities positions or to
maintain an investment strategy (such as account type), recommendations
to open an account, or recommendations that may

ultimately be rejected by the retail customer.
    Whether the recommendation complies with Regulation Best Interest
will be evaluated based on the circumstances that existed at the time
the recommendation was made to the retail customer. Accordingly,
broker-dealers should carefully consider the extent to which associated
persons can make recommendations to prospective retail customers (i.e.,
that have received, but not yet ``used'' the recommendation as noted
above) in compliance with Regulation Best Interest, including having
gathered sufficient information that would enable them to comply with
Regulation Best Interest at the time the recommendation is made, should