broker-dealers under the federal securities laws by, among other
things, imposing a ``best interest'' requirement that will require a
broker-dealer to not place its own interest ahead of the retail
customer's interest, when making recommendations.\549\
---------------------------------------------------------------------------

    \549\ As discussed in the Fiduciary Interpretation, the duty of
care of the investment adviser's fiduciary duty includes a duty to
provide investment advisory services that are in the best interest
of the client. See Fiduciary Interpretation at footnote 34.
---------------------------------------------------------------------------

    Commenters generally supported the proposed Care Obligation,
including its principles-based approach, but many commenters requested
additional guidance or clarification on how a broker-dealer could
satisfy the Care Obligation under different circumstances and regarding
specific products.\550\ Relatedly, several commenters requested further
guidance regarding the role of costs and other relevant factors when
making a best interest determination,\551\ while other commenters
expressed concern over the usage of the term ``prudence'' \552\ or
expressed concern that Regulation Best Interest is not a major change
from FINRA's suitability rule.\553\ Numerous commenters also requested
clarification on the meaning and scope of ``reasonably available
alternatives'' and ``otherwise identical securities,'' including how
the phrase ``reasonably available alternatives'' would apply in
situations where a broker-dealer operated in an open architecture
environment,\554\ or maintained a limited product menu such as where
broker-dealers limited available offerings to proprietary
products.\555\ Finally, several commenters recommended the Commission
include other factors in building a retail customer's investment
profile, such as longevity risk,\556\ market risk,\557\ or income
profile.\558\
---------------------------------------------------------------------------

    \550\ See, e.g., NASAA August 2018 Letter; Cambridge Letter;
BlackRock Letter.
    \551\ See, e.g., Wells Fargo Letter; Primerica Letter; CFA
Institute Letter.
    \552\ See, e.g., BISA Letter; Raymond James Letter; Transamerica
August 2018 Letter.
    \553\ See, e.g., CFA August 2018 Letter (stating ``[n]owhere
does the Commission explain how the standard differs from, or even
whether it improves upon, the existing suitability standard under
FINRA rules''); AFL-CIO April 2019 Letter (stating ``that the intent
of [proposed Regulation Best Interest] is to codify, rather than
enhance, protections investors currently receive under FINRA's
suitability standard'').
    \554\ For purposes of this requirement, we use the term ``open
architecture'' to mean a firm's product menu that includes both
third-party and proprietary products, or as a concept wherein a firm
offers a large range of products to their retail customers that are
not limited, for example, to a small list of approved managers or
funds (i.e., a product menu that is not limited to proprietary
products or otherwise constrained to certain retail customers or
registered representatives). See generally FINRA 2013 Conflicts
Report; Morgan Stanley Letter.
    \555\ See, e.g., Fidelity Letter; ICI Letter; LPL August 2018
Letter; SIFMA August 2018 Letter; Prudential Letter; Morningstar
Letter.
    \556\ See, e.g., CCMC Letters; Lincoln Financial Letter; Pacific
Life August 2018 Letter.
    \557\ See, e.g., Jackson National Letter.
    \558\ See, e.g., Lincoln Financial Letter.
---------------------------------------------------------------------------

    We are adopting the Care Obligation substantially as proposed, but
with certain modifications and additional guidance to address comments.
As discussed in more detail below, in response to comments, we are
revising the Care Obligation to remove the term ``prudence,'' as we
have concluded that its inclusion creates legal uncertainty and
confusion, and it is redundant of what we intended in requiring a
broker-dealer to exercise ``diligence, care, and skill,'' and its
removal does not change the requirements under the Care Obligation.
Accordingly, the Care Obligation will require broker-dealers to
``exercise reasonable diligence, care, and skill'' to meet the three
components of the Care Obligation.
    In addition, after careful consideration of the comments received,
we are expressly adding cost to the rule text as a factor that a
broker-dealer must consider in fulfilling the Care Obligation. While
certain commenters expressed concerns about the prominence of cost and
how cost would be balanced against other factors under the Care
Obligation,\559\ other

commenters supported incorporating cost into the rule text.\560\ As
noted in the Relationship Summary Adopting Release, participants in
investor testing and roundtables also overwhelmingly supported
including fees in the Relationship Summary, and believed that the
``fees and costs'' section was the most important for determining which
type of investment accounts and services are right for that
person.\561\ We believe that while the factors that a broker-dealer
should understand and consider when making a recommendation may vary
depending upon the particular product or strategy recommended, cost--
along with potential risks and rewards--will always be a relevant
factor that will bear on the return of the security or investment
strategy involving securities.\562\ This would include, for example,
both costs associated with the purchase of the security, as well as any
costs that may apply to the future sale or exchange of the security,
such as deferred sales charges or liquidation costs. Elevating cost to
the rule text clarifies that this factor must always be considered when
making a recommendation. Thus, a broker-dealer, in fulfilling its
obligation to make a recommendation in the best interest of its retail
customer, must exercise reasonable diligence, care, and skill to
understand the ``potential risks, rewards, and costs'' associated with
the recommendation and have a reasonable basis to believe that the
recommendation is in the best interest of the retail customer based on
these factors.
---------------------------------------------------------------------------

    \559\ See, e.g., ICI Letter; Putnam Letter; Morgan Stanley
Letter; Letter from Eric R. Dinallo, Executive Vice President,
General Counsel, Guardian Life (Aug. 7, 2018) (``Guardian August
2018 Letter'') (cautioning against inclusion of ``costs'' into rule
text or overemphasizing its importance).
    \560\ See, e.g., AFL-CIO April 2019 Letter (stating ``If, as has
been suggested, one goal is to ensure that brokers give greater
consideration to costs in determining what investments to recommend,
[Regulation Best Interest] should incorporate an explicit
requirement to consider costs in the rule text.''); NASAA August
2018 Letter; U. of Miami Letter (supporting addition of ``costs''
into rule text). See also CFA August 2018 Letter (supporting the
Commission's emphasis of cost and associated financial incentives as
more important factors, and stating ``[t]his requirement would be
clearer, however, if it were incorporated into the rule text, which
requires the broker to consider the `potential risks and rewards
associated with the recommendation,' rather than the material
characteristics, including costs, of the recommended investment or
investment strategy.'').
    \561\ See Relationship Summary Adopting Release.
    \562\ See Vanguard Letter (``We agree that costs and
remuneration should play a central role in meeting the revise best
interest standards. Cost is a critical factor because of its
compounding effect upon performance.'').
---------------------------------------------------------------------------

    Importantly, however, while cost, like potential risks and rewards,
is always a factor that a broker-dealer must consider in making a
recommendation, it is not a dispositive factor and its inclusion in the
rule text is not meant to limit or foreclose the recommendation of a
more costly or complex product that a broker-dealer has a reasonable
basis to believe is in the best interest of a particular retail
customer.\563\ Moreover, we are reiterating that the standard does not
necessarily require the lowest cost option, and that while cost is an
important factor that always needs to be taken into consideration in
making a recommendation, it is not the only one.\564\ Rather, as
explained more fully below, the evaluation of cost would be more
analogous to a broker-dealer's best execution analysis, which does not
require the lowest possible cost, but rather looks at whether the
transaction represents the best qualitative execution for the customer
using cost as one factor.\565\
---------------------------------------------------------------------------

    \563\ See Proposing Release at 21587-21589; 21610-21612.
    \564\ See Proposing Release at 21610.
    \565\ Under the antifraud provisions of the federal securities
laws and SRO rules, broker-dealers have a legal duty to seek to
obtain best execution of customer orders. See Regulation NMS,
Exchange Act Release No. 51808 (Jun. 9, 2005) (``Regulation NMS
Release''); FINRA Rule 5310 (Best Execution and Interpositioning). A
broker-dealer's duty of best execution requires a broker-dealer to
seek to execute customers' trades at the most favorable terms
reasonably available under the circumstances. See Regulation NMS
Release at 160; see also Proposing Release at 21615. Certain
commenters pointed to best execution analysis as an example of a
rule or guidance that is facts-and-circumstances-based. See, e.g.,
CFA August 2018 Letter (``Just as compliance with the best execution
standard will not always be met by sending trades to the exchange
where the lowest cost is displayed, compliance with a best interest
standard will not always be satisfied by recommending the lowest
cost option.'').
---------------------------------------------------------------------------

    Several commenters expressed concern over the emphasis of ``cost''
and suggested that, for example, more emphasis be placed on additional
or subjective factors beyond specific product attributes.\566\ Those
commenters stated that the emphasis on cost may discourage certain
products or investment strategies. Our intent is not to discourage or
otherwise limit the recommendation of products or investment strategies
where a broker-dealer concludes that the recommendation is in the best
interest of the retail customer. Instead, we believe that cost will
always be relevant to a recommendation and accordingly should be a
required consideration as set forth in the rule text. It should never
be the only consideration. Additional factors such as those cited by
commenters also should be taken into consideration as the broker-dealer
formulates a recommendation consistent with the best-interest
standard.\567\
---------------------------------------------------------------------------

    \566\ See, e.g., ICI Letter; BlackRock Letter; Putnam Letter;
Transamerica August 2018 Letter; Northwestern Mutual Letter; see
also Vanguard Letter (recognizing the importance of cost, but urging
the Commission to maintain a principles-based approach recognizing
the importance of ``holistic advice that necessarily contemplates
factors beyond cost.'').
    \567\ See, e.g., BlackRock Letter (citing consideration of
investors' needs and desired outcomes relative to service offerings
of several different managers); Vanguard Letter (``considerations
include important factors such as product structure, investment
features, liquidity, volatility, issuer reputation, brand and
business practices (securities lending activities, portfolio
tracking error, or usage of derivatives in a portfolio)''); ICI
Letter (citing several subjective factors, such as the ``nature and
quality of a provider's services (including advantages to the
investor of consolidating investments as a single firm, such as
higher levels of service that may be offered), minimum initial
investments, and firm reputation''); FIBA February 2019 Letter
(citing ``highly personalized non-economic reasons underlying cross-
border investment'').
---------------------------------------------------------------------------

    Though we are declining to expressly define ``best interest'' in
the rule text, as discussed above,\568\ we are providing guidance
regarding the application of the Care Obligation and in particular what
it means to make a recommendation in the retail customer's ``best
interest.'' In addition, to emphasize the importance of determining
that each recommendation is in the best interest of the retail customer
and that it does not place the broker-dealer's interests ahead of the
retail customer's interests, we are expressly incorporating into the
rule text of Paragraph (a)(2)(ii)(B) and Paragraph (a)(2)(ii)(C) of
Regulation Best Interest that a broker-dealer must have a reasonable
basis to believe that the recommendation ``does not place the financial
or other interest of the [broker-dealer] . . . ahead of the interest of
the retail customer.'' While we acknowledge that a broker-dealer and an
associated person can and will have some financial interest in a
recommendation, as noted above, this addition to the Care Obligation
makes clear these interests cannot be placed ahead of the retail
customer's interests when making a recommendation.\569\
---------------------------------------------------------------------------

    \568\ See Section II.A.2.
    \569\ See id. See also AFL-CIO April 2019 Letter (noting
``Adopting a standard that explicitly states that brokers are
prohibited form placing their own interests ahead of the retail
customer's interests reinforces [investors' reasonable expectations
that the financial professionals they rely on for investment advice
will put their interests first]'' and asserting that ``a requirement
to place the customer's interests ahead of the brokers' interests
must be included in the operational provisions of Reg BI. . . .'').
---------------------------------------------------------------------------

    Finally, we believe that by explicitly requiring in the rule text
that the broker-dealer have a reasonable basis to believe that a
recommendation is both in the retail customer's ``best interest'' and

does ``not place the financial or other interest'' of the broker-dealer
ahead of the retail customer's interests, we are enhancing the Care
Obligation by imposing obligations beyond existing suitability
obligations. Under existing suitability requirements, a broker-dealer
is required to make recommendations that are ``suitable'' for the
customer. While certain cases and guidance have interpreted FINRA's
suitability rule to require that ``a broker's recommendations must be
consistent with his customers' best interests,'' and FINRA has further
interpreted the requirement to be ``consistent with the customer's best
interest'' to prohibit a broker-dealer from placing his or her
interests ahead of the customer's interests, this obligation is not
explicitly required by FINRA's rule (or its supplementary material),
nor does the interpretation require recommendations to be in the best
interest (as opposed to ``consistent with the best interest'') of a
retail customer.\570\ We believe that requiring recommendations to be
in the best interest is declarative of what must be done, and therefore
stronger than, requiring recommendations to be ``consistent with'' the
best interest of the retail customer, which we believe at a minimum
creates ambiguity as to whether the recommendation must be in the
retail customer's best interest or something less.\571\
---------------------------------------------------------------------------

    \570\ See FINRA Regulatory Notice 12-25 at Q1. See also FINRA
Letter to Senators Warren, Brown, and Booker (Aug. 3, 2018) (``FINRA
2018 Letter'') (stating that ``[w]hile FINRA's suitability rule
implicitly requires a broker-dealer's recommendations to be
consistent with customer's best interests, the SEC's proposed best
interest standard explicitly establishes the customer's best
interest as an overarching standard of care for broker-dealers.''
(internal citations omitted)). Some commenters have also made this
point. See, e.g., CFA August 2018 Letter (``In enforcing that
standard, however, FINRA has only rarely and very narrowly enforced
the obligation to do what is best for the customer--typically in
cases that involve recommending the most appropriate share class of
a particular mutual fund. . . . Indeed, as we detailed in our July
2015 comment letter to the Department of Labor, most of the cases in
which FINRA and the Commission have asserted an obligation for
brokers to act in customers' best interest have involved egregious
frauds rather than questions of whether customers' best interests
were being served.'').
    \571\ See, e.g., CFA August 2018 Letter.
---------------------------------------------------------------------------

    The Care Obligation significantly enhances the investor protection
provided as compared to current suitability obligations by: (1)
Explicitly requiring in Regulation Best Interest that recommendations
be in the best interest of the retail customer and do not place the
broker-dealer's interests ahead of the retail customer's interests; (2)
explicitly requiring by rule the consideration of costs when making a
recommendation; and (3) applying the obligations relating to a series
of recommended transactions (currently referred to as ``quantitative
suitability'') irrespective of whether a broker-dealer exercises actual
or de facto control over a customer's account.\572\ In addition, it is
our view that a broker-dealer should consider ``reasonably available
alternatives'' as part of having a ``reasonable basis to believe'' that
the recommendation is in the best interest of the retail customer,
which we also believe is an enhancement beyond existing suitability
expectations.\573\
---------------------------------------------------------------------------

    \572\ See FINRA 2018 Letter (noting that proposed Regulation
Best Interest augments and enhances current requirements by, among
other things: ``explicitly impos[ing] a `best interest' standard,
making clear that a broker-dealer cannot put its interests ahead of
the interests of its customers. While FINRA's suitability rule
implicitly requires a broker-dealer's recommendations to be
consistent with customers' best interests, the SEC's proposed best
interest standard explicitly establishes the customer's best
interest as an overarching standard of care for broker-dealers;''
``explicitly requir[ing] broker-dealers to consider `reasonably
available alternatives' to a recommended security and justify any
choice of a more costly product. . . . Although case law and FINRA
guidance establish cost and available alternatives as factors to
consider as part of a FINRA suitability assessment, particularly
regarding mutual fund share classes, proposed Reg Bl expressly
establishes the significance of these factors''; and ``remov[ing]
the `control' element for purposes of quantitative suitability,
which would make this obligation more enforceable.'') (internal
citations omitted).
    \573\ See infra Section II.C.2.c, Application of the Care
Obligation--Reasonably Available Alternatives and Otherwise
Identical Securities.
---------------------------------------------------------------------------

a. Exercise Reasonable Diligence, Care, and Skill
    A broker-dealer is required to ``exercise reasonable diligence,
care, and skill'' to satisfy the three components of the Care
Obligation set forth in Regulation Best Interest. In the Proposing
Release, we included ``prudence,'' and explained that ``prudence''
``conveys the fundamental importance of conducting a proper evaluation
of any securities or investment strategy recommendation in accordance
with an objective standard of care.'' \574\ Further, we solicited
comment on all aspects of the Care Obligation, and also asked
specifically whether there was adequate clarity and understanding
regarding the term ``prudence,'' or whether other terms were more
appropriate in the context of broker-dealer regulation.
---------------------------------------------------------------------------

    \574\ Proposing Release at 21609.
---------------------------------------------------------------------------

    Several commenters supported adopting a principles-based
obligation, thus requiring the broker-dealer to assess the adequacy of
a recommendation based on the facts and circumstances of each
recommendation.\575\ We also received numerous comments asking for
further guidance relating to recommendations of specific securities or
asking how the Care Obligation applies to certain factual
scenarios.\576\ With respect to the term ``prudence,'' a number of
comments requested removal of the term, stating that such language is
unnecessary given the other requirements to satisfy the Care
Obligation, as well as the fact that the term introduces legal
confusion and uncertainty.\577\ Other commenters supported the use of
the term ``prudence'' because they believed that Regulation Best
Interest's component obligations generally rested on a ``prudence''
standard or maintained that the Care Obligation ``echoes elements found
in the common law `prudent person rule,' '' and thus thought its
addition was appropriate to capture, or describe, these
obligations.\578\
---------------------------------------------------------------------------

    \575\ See, e.g., SIFMA August 2018 Letter; Vanguard Letter;
Morningstar Letter; Edward Jones Letter.
    \576\ See, e.g., SIFMA August 2018 Letter; Direxion Letter;
Chapman Letter.
    \577\ See, e.g., Primerica Letter (stating ``. . . . the term
[prudence] raises numerous interpretative issues and compliance
risks. Regulatory and judicial interpretations of ERISA `prudence'
and its requirements abound, but these are exclusive to employee
benefit plan duties and do not address duties with respect to retail
accounts for individual customers.''); Transamerica August 2018
Letter (``The term `prudence' is one used primarily in the ERISA
context and is not generally used in the federal securities laws. We
believe inclusion of the term `prudence' in describing the care
obligation is unnecessary and could lead to confusion in
interpretation of the care obligation set forth in the Proposal'');
IPA Letter (`` `Prudence' is an ERISA term based on trust law that
is not generally used under the federal securities laws''). See also
Fein Letter (discussing that the ``duties of loyalty and care are
the core fiduciary standards that apply across all fiduciary fields,
including trust law, agency law, and employee benefits law;'' that
``[b]oth of these duties are reflected in the existing regulation of
broker-dealers and investment advisers when they give investment
advice to retail customers;'' and that the ``duty of care--also
called `prudence'--requires a fiduciary to act with care, skill and
diligence in fulfilling his designated functions.'') (internal
citations omitted).
    \578\ See LPL August 2018 Letter (``We believe that each of the
four component obligations identified in Regulation BI generally
rests on a `prudence' standard that is the foundation of the common
law principles and the Federal law that have governed the activities
of financial services providers for decades. The obligation to
provide prudent recommendations that are appropriate for an
investor's circumstances is a principal component of the suitability
obligations that apply to investment advisers under the [Advisers
Act]'' (internal citations omitted); FPC Letter (stating that ``the
duty of care, as described by both Reg BI and CFP Board Standards,
echoes elements found in the common law `prudent person rule' which
can serve to measure the reasonableness of a prudent professional's
actions. . . .''); see also CFA August 2018 Letter; NAIFA Letter.
---------------------------------------------------------------------------

    After careful consideration of comments, we are revising the Care
Obligation to remove the term

``prudence.'' Accordingly, the Care Obligation will require broker-
dealers to ``exercise reasonable diligence, care, and skill'' to meet
the three components of the Care Obligation. We are persuaded by
commenters that its inclusion in the proposed rule text to satisfy the
components of the Care Obligation is superfluous and unnecessarily
presents the possibility for confusion and legal uncertainty.\579\ We
believe requiring broker-dealers ``to exercise reasonable diligence,
care, and skill'' conveys ``the fundamental importance of conducting a
proper evaluation of any securities recommendation in accordance with
an objective standard of care'' \580\ that was intended by the
inclusion of ``prudence.'' Removing ``prudence'' does not lessen nor
otherwise change the requirements or our expectations under the Care
Obligation, or Regulation Best Interest more broadly as it was
duplicative of the phrase ``diligence, care, and skill.'' \581\ The
revised obligation, in requiring the broker-dealer to ``exercise[ ]
reasonable diligence, care and skill'' and to have a ``reasonable basis
to believe that the recommendation is in the best interest . . . and
does not place'' the interest of the broker-dealer ahead of the
interest of the retail customer, will continue to require an analysis
that is comparable to the notion of ``prudence'' as described in other
regulatory frameworks,\582\ but does so using the terms ``diligence,
skill, and care''--terminology with which broker-dealers are familiar
and that is well understood under the federal securities laws.\583\ As
such, we believe that the revised language will minimize the potential
confusion and legal uncertainty created by using a term that is
predominantly interpreted in other legal regimes,\584\ and will aid
broker-dealers in achieving compliance with Regulation Best Interest as
well as permit broker-dealers to utilize existing compliance and
supervisory systems that already rely on this language.
---------------------------------------------------------------------------

    \579\ See supra footnote 577.
    \580\ Proposing Release at 21609.
    \581\ See, e.g., LPL August 2018 Letter (noting that the
component obligations of Regulation Best Interest generally rest on
``prudence'' concepts); Fein Letter.
    \582\ See Fein Letter (stating that the ``duty of care--also
called `prudence'--requires a fiduciary to act with care, skill and
diligence in fulfilling his designated functions'') (citing
Restatement 3d of Agency, Sec.  8.08 Duties of Care, Competence, and
Diligence (``[s]ubject to any agreement with the principal, an agent
has a duty to the principal to act with care, competence, and
diligence normally exercised by agents in similar circumstances. . .
.'')). The DOL interpreted ``prudence'' to represent ``an objective
standard of care that requires investment advice fiduciaries to
investigate and evaluate investments, make recommendations, and
exercise sound judgment in the same way that knowledgeable and
impartial professionals would.'' BIC Exemption Release, 81 FR 21208
at 21028-21029.
    \583\ See, e.g., Proposing Release at 21595, 21609-21613. The
discussion that follows addresses what it means to ``exercise
reasonable diligence, care, and skill'' in the context of each
aspect of the Care Obligation.
    \584\ See supra footnote 577.
---------------------------------------------------------------------------

    Moreover, we note that certain commenters' support for the term
``prudence'' was based on our interpretation of the Care Obligation in
the Proposing Release.\585\ As noted above, the removal of the term
``prudence'' does not change the obligations or our interpretation of
the Care Obligation, which we believe are addressed by the ``diligence,
care, and skill'' language and through Regulation Best Interest more
broadly. In light of concerns regarding legal uncertainty associated
with the term ``prudence,'' and our view that its inclusion or removal
would not change the requirements or expectations of Regulation Best
Interest, we have determined to remove it from the rule text.
---------------------------------------------------------------------------

    \585\ See, e.g., NAIFA Letter.
---------------------------------------------------------------------------

    Finally, in response to comments, we are retaining the facts-and-
circumstances determination for the reasons set forth in the Proposing
Release,\586\ and providing additional guidance on the application of
the components of the Care Obligation with respect to certain
securities and under certain scenarios. As we noted in the Proposing
Release, such an approach is consistent with how broker-dealers are
currently regulated with respect to the suitability of their
recommendations and would allow broker-dealers to utilize and
incorporate pre-existing compliance systems. In addition, this approach
is generally consistent with the principles-based approach applicable
to the duty of care of investment advisers.\587\
---------------------------------------------------------------------------

    \586\ Proposing Release at 21587 (``[W]e preliminarily believe
that whether a broker-dealer acted in the best interest of the
retail customer when making a recommendation will turn on the facts
and circumstances of the particular recommendation and the
particular retail customer, along with the facts and circumstances
of how the four specific components of Regulation Best Interest are
satisfied.'').
    \587\ See Fiduciary Interpretation.
---------------------------------------------------------------------------

b. Understand Potential Risks, Rewards, and Costs Associated With
Recommendation, and Have a Reasonable Basis To Believe That the
Recommendation Could Be in the Best Interest of at Least Some Retail
Customers
    Under the proposed ``reasonable basis'' component of the Care
Obligation, broker-dealers would be required to understand the
potential risks and rewards of the recommendation and have a reasonable
basis to believe that the recommendation could be in the best interest
of at least some retail customers. Although potential costs were not
specifically included in the proposed rule text as a factor to be
considered as part of a recommendation, the Proposing Release
identified potential costs associated with a recommendation as an
important factor to understand and consider as part of making a
recommendation, and likewise as a key factor to consider when
evaluating whether or not a broker-dealer had a reasonable basis to
believe it was acting in the best interest of the retail customer when
making the recommendation.\588\
---------------------------------------------------------------------------

    \588\ See Proposing Release at 21609-21612. See also supra
footnote 572.
---------------------------------------------------------------------------

    After careful consideration of comments, the Commission is
adopting, for the reasons set forth in the Proposing Release, Paragraph
(a)(2)(ii)(A) of the Care Obligation substantially as proposed.
However, as discussed above, in addition to requiring broker-dealers to
understand the potential risks and rewards associated with the
recommendation, we are also expressly requiring them to understand and
consider the potential costs associated with a recommendation.
Elevating costs to the rule text is consistent with a number of
commenters' recommendations and, importantly, stresses that cost will
always be a salient factor to be considered when making a
recommendation.\589\ Additionally, this requirement that the broker-
dealer understands and considers costs is a distinct enhancement over
existing reasonable basis suitability obligations, which do not
expressly require this consideration.\590\ Nevertheless, we recognize--
and emphasize--that cost is one important factor among many factors,
and thus provide additional guidance below regarding the importance of
weighing and considering costs in light of other relevant factors and
the retail customer's investment profile.
---------------------------------------------------------------------------

    \589\ See, e.g., AFL-CIO April 2019 Letter; NASAA August 2018
Letter; U. of Miami Letter.
    \590\ See supra footnote 572.
---------------------------------------------------------------------------

    Paragraph (a)(2)(ii)(A) of Regulation Best Interest is intended to
incorporate and build upon broker-dealer's existing ``reasonable-basis
suitability'' obligations and would relate to the broker-dealer's
understanding of the particular security or investment strategy
recommended, rather than to any particular retail customer. Without
establishing such a threshold understanding of its particular

recommended security or investment strategy involving securities, we do
not believe that a broker-dealer could, as required by Regulation Best
Interest, have a reasonable basis to believe that it is acting in the
best interest of a retail customer when making a recommendation.\591\
---------------------------------------------------------------------------

    \591\ See Proposing Release at 21609-21610 (for further
discussion regarding this requirement).
---------------------------------------------------------------------------

    In order to meet the requirement under Paragraph (a)(2)(ii)(A), a
broker-dealer would need to undertake reasonable diligence, care, and
skill to understand the nature of the recommended security or
investment strategy involving a security or securities, as well as the
potential risks, rewards--and now costs--of the recommended security or
investment strategy, and have a reasonable basis to believe that the
recommendation could be in the best interest of at least some retail
customers based on that understanding. A broker-dealer must adhere to
both components of Paragraph (a)(2)(ii)(A). For example, a broker-
dealer could violate the obligation by not understanding the potential
risks, rewards, or costs of the recommended security or investment
strategy, even if the security or investment strategy could have been
in the best interest of at least some retail customers. Conversely,
even if a broker-dealer understands the recommended security or
investment strategy, the broker-dealer must still have a reasonable
basis to believe that the security or investment strategy could be in
the best interest of at least some retail customers.
    What would constitute reasonable diligence, care, and skill under
Paragraph (a)(2)(ii)(A) will vary depending on, among other things, the
complexity of and risks associated with the recommended security or
investment strategy and the broker-dealer's familiarity with the
recommended security or investment strategy.\592\ While every inquiry
will be specific to the particular broker-dealer and the recommended
security or investment strategy, broker-dealers generally should
consider important factors such as the security's or investment
strategy's investment objectives, characteristics (including any
special or unusual features), liquidity, volatility, and likely
performance in a variety of market and economic conditions; the
expected return of the security or investment strategy; as well as any
financial incentives to recommend the security or investment strategy.
Together, this inquiry should allow the broker-dealer to develop a
sufficient understanding of the security or investment strategy and to
be able to reasonably believe that it could be in the best interest of
at least some retail customers.
---------------------------------------------------------------------------

    \592\ See FINRA Rule 2111.05(a).
---------------------------------------------------------------------------

    This ``reasonable-basis'' component of the Care Obligation is
especially important when broker-dealers recommend securities and
investment strategies that are complex or risky.\593\ For example, in
recent years, the Commission staff and FINRA have addressed broker-
dealer sales practice obligations under existing law relating to
complex products, such as inverse or leveraged exchange-traded
products.\594\ These products, which may be useful for some
sophisticated trading strategies, are highly complex financial
instruments and are typically designed to achieve their stated
objectives on a daily basis.\595\ However, because of the effects of
compounding, the performance of these products over longer periods of
time can differ significantly from their stated daily objectives. Thus,
broker-dealers recommending such products should understand that
inverse and leveraged exchange-traded products that are reset daily may
not be suitable for, and as a consequence also not in the best interest
of, retail customers who plan to hold them for longer than one trading
session, particularly in volatile markets.\596\ Without understanding
the terms, features, and risks of inverse and leveraged exchange-traded
products--as with the potential risks, rewards, and costs of any
security or investment strategy--a broker-dealer could not establish a
reasonable basis to recommend these products to retail customers.\597\
Further, these products may not be in the best interest of a retail
customer absent an identified, short-term, customer-specific trading
objective. Similarly, when a broker-dealer recommends a potentially
high risk product to a retail customer--such as penny stocks or other
thinly-traded securities--the broker-dealer should generally apply
heightened scrutiny to whether such investments are in a retail
customer's best interest.\598\
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    \593\ See FINRA Rule 2111 (Suitability) FAQ at Q5.1 (``The
reasonable-basis obligation is critically important because, in
recent years, securities and investment strategies that brokers
recommend to customers, including retail investors, have become
increasingly complex and, in some cases, risky.). See also SEC v.
Hallas, No. 17-cv-02999 (S.D.N.Y. filed Apr. 25, 2017).
    \594\ See FINRA Regulatory Notice 09-31, Non-Traditional ETFs--
FINRA Reminds Firms of Sales Practice Obligations Relating to
Leveraged and Inverse Exchange-Traded Funds (June 2009); SEC staff
and FINRA, Investor Alert, Leveraged and Inverse ETFs: Specialized
Products with Extra Risks for Buy-and-Hold Investors (Aug. 1, 2009);
SEC Office of Investor Education and Advocacy, Investor Bulletin:
Exchange-Traded Funds (ETFs) (Aug. 2012).
    \595\ See id. See also Exchange-Traded Funds, Securities Act
Release No. 10515 (Jun. 28, 2018); Use of Derivatives by Registered
Investment Companies and Business Development Companies, Investment
Company Act Release No. 31933 (Dec. 11, 2015) [80 FR 80883 (Dec. 28,
2015)] (``Derivatives Proposing Release''); Direxion Letter
(recognizing that leveraged ETFs are not appropriate for all
customers, and thus the importance for broker-dealers to perform
sufficient diligence to adequately ``understand the terms and
features of such funds, including how they are designed to perform,
how they achieve that objective, and the impact that market
volatility, the ETF's use of leverage, and the customer's intended
holding period will have on their performance'').
    \596\ See supra footnotes 593-595.
    \597\ See id.
    \598\ See, e.g., FINRA Regulatory Notice 17-32, Volatility-
Linked Exchange Traded Products--FINRA Reminds Firms of Sales
Practice Obligations for Volatility-Linked Exchange-Traded Products
(Oct. 2017) (explaining that ``The level of reasonable diligence
that is required will rise with the complexity and risks associated
with the security or strategy. With regard to a complex product such
as a volatility-linked ETP, an associated person should be capable
of explaining, at a minimum, the product's main features and
associated risks.''); FINRA Regulatory Notice 12-03, Complex
Products--Heightened Supervision of Complex Products (Jan. 2012)
(stating that ``Reasonable diligence must provide the firm or
registered representative `with an understanding of the potential
risks and rewards associated with the recommended security or
strategy.' This understanding should be informed by an analysis of
likely product performance in a wide range of normal and extreme
market actions. The lack of such an understanding when making the
recommendation could violate the suitability rule.'') (internal
citations omitted).
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    Finally, several commenters expressed concern about the
applicability of Regulation Best Interest to variable annuities and
variable life insurance products.\599\ Variable annuities and variable
life insurance products have generated special attention from
regulators and their staff, such as statements regarding sales practice
obligations and specific FINRA rules relating to the recommendation of
variable annuities.\600\ These variable insurance products are often
unique and have different features depending on the company providing
the product, as well as depending on the chosen investment options,
benefits, fees and expenses, liquidity restrictions, and other
considerations.\601\ Consistent with

existing FINRA rules and existing suitability obligations under the
federal securities laws and SRO rules, regulators and their staffs have
stated that recommendations of these products would require careful
attention and a specific understanding of certain factors, such as
whether the product provides tax-deferred growth, or a death or living
benefit, before a broker-dealer could establish an understanding of the
product, and apply that understanding to a retail customer's investment
profile in making a recommendation.
---------------------------------------------------------------------------

    \599\ See related discussion in Section II.C.2.c, Retail
Customer Investment Profile.
    \600\ See, e.g., FINRA Rule 2330, Members Responsibilities
Regarding Deferred Variable Annuities; FINRA Rule 2320, Variable
Contracts of Insurance Companies; FINRA Regulatory Notice 10-05,
Deferred Variable Annuities--FINRA Reminds Firms of Their
Responsibilities Under FINRA Rule 2330 for Recommended Purchases or
Exchange of Deferred Variable Annuities (Jan. 2010); SEC Updated
Investor Bulletin: Variable Annuities (Oct. 30, 2018); SEC Investor
Bulletin: Variable Life Insurance (Oct. 30, 2018).
    \601\ See id. See also Updated Disclosure Requirements and
Summary Prospectus for Variable Annuity and Variable Life Insurance
Contracts, Investment Advisers Act Release No. 10569 (Oct. 30, 2018)
[83 FR 61730 (Nov. 30, 2018)] (``VA Summary Prospectus Proposal'').
---------------------------------------------------------------------------

    While we stress the importance of understanding the potential
risks, rewards, and costs associated with a recommended security or
investment strategy, as well as other factors depending on the facts
and circumstances of each recommendation, we do not intend to limit or
foreclose broker-dealers from recommending complex or more costly
products or investment strategies where the broker-dealer has a
reasonable basis to believe that a recommendation could be in the best
interest of at least some retail customers and the broker-dealer has
developed a proper understanding of the recommended product or
investment strategy. As discussed below, once a broker-dealer develops
an appropriate understanding of a securities product or investment
strategy, including its potential costs, and believes it could be in
the best interest of at least some retail customers, the broker-dealer
will then need to apply that understanding to reasonably determine that
the recommended product or investment strategy is in the particular
retail customer's best interest at the time of the recommendation.
c. Have a Reasonable Basis To Believe the Recommendation Is in the Best
Interest of a Particular Retail Customer Based on That Retail
Customer's Investment Profile and the Potential Risks, Rewards, and
Costs Associated With the Recommendation and Does Not Place the
Interest of the Broker-Dealer Ahead of the Interest of the Retail
Customer
    In the Proposing Release, we stated that beyond establishing an
understanding of the recommended securities transaction or investment
strategy, in order to act in the best interest of the retail customer,
a broker-dealer would be required to have a reasonable basis to believe
that a specific recommendation is in the best interest of the
particular retail customer based on its understanding of the investment
or investment strategy under Paragraph (a)(2)(ii)(A), and in light of
the retail customer's investment objectives, financial situation, and
needs. Accordingly, under proposed paragraph (a)(2)(ii)(A), the second
sub-component of the Care Obligation would require a broker-dealer to
``exercise reasonable diligence, care, skill, and prudence to . . .
have a reasonable basis to believe that the recommendation is in the
best interest of a particular retail customer based on that retail
customer's investment profile and the potential risks and rewards
associated with the recommendation.'' In the Proposing Release, the
Commission further articulated that under this standard, a broker-
dealer could not have a reasonable basis to believe that the
recommendation is in the ``best interest'' of the retail customer, if
the broker-dealer put its interest ahead of the retail customer's
interest. This was intended to incorporate a broker-dealer's existing
well-established obligations under ``customer-specific suitability,''
but also to enhance these obligations by requiring that the broker-
dealer have a reasonable basis to believe that the recommendation is in
the ``best interest'' of (rather than ``suitable for'') the retail
customer.
    Commenters largely supported the Commission's proposed approach,
but several commenters requested clarifying guidance regarding the
importance of costs and other specific factors in a ``best interest''
evaluation, as well as more broadly how ``best interest'' was to be
determined.\602\ For example, several commenters requested additional
guidance on the role of costs and other ``relevant factors,'' including
subjective and qualitative factors such as shareholder support
services, redemption procedures, or qualifications of the investment
adviser.\603\ Similarly, several commenters asked for clarification
that ``best interest'' does not necessarily mean the lowest cost option
or require the broker-dealer to look at every single possible
security.\604\ Commenters also requested further direction regarding
guidance in the Proposing Release related to the consideration of
``reasonably available alternatives'' and ``otherwise identical
securities,'' and requested certain modifications to the definition of
``Retail Customer Investment Profile.'' \605\
---------------------------------------------------------------------------

    \602\ See, e.g., Wells Fargo Letter; Primerica Letter; Great-
West Letter; NASAA August 2018 Letter; Cambridge Letter; BlackRock
Letter.
    \603\ See Chapman Letter; BlackRock Letter; Vanguard Letter; ICI
Letter; Morgan Stanley Letter.
    \604\ See Great-West Letter; SIFMA August 2018 Letter.
    \605\ See, e.g., Committee of Annuity Insurers Letter; Guardian
August 2018 Letter; IPA Letter; Morgan Stanley Letter; Invesco
Letter; CFA August 2018 Letter.
---------------------------------------------------------------------------

    After careful consideration of these comments, for the reasons set
forth in the Proposing Release, the Commission is adopting the
``customer specific'' component of the Care Obligation substantially as
set forth in the Proposing Release. However, as included under the
reasonable basis component of the Care Obligation and for the reasons
discussed above, the Commission is expressly incorporating ``costs''
into the rule text to emphasize that broker-dealers must consider the
potential costs associated with a recommendation to a particular retail
customer.
    As noted above, the Commission is also incorporating into the rule
text that broker-dealers must have a reasonable basis to believe that
the recommendation ``does not place the financial or other interest of
the broker-dealer ahead of the interest of the retail customer.'' \606\
This addition is intended to make clear that while a broker-dealer
typically will have some interest in a recommendation, the broker-
dealer cannot put that interest ahead of the retail customer's interest
when making the recommendation.
---------------------------------------------------------------------------

    \606\ See related discussion in Section II.A.2; see also
Fiduciary Interpretation.
---------------------------------------------------------------------------

    To address feedback from commenters, the Commission is also
providing further interpretations and guidance regarding the
application of the Care Obligation, and in particular, what it means to
make a recommendation in a retail customer's best interest and not
place the broker-dealer's interest ahead of the retail customer's
interest. Specifically, recognizing that a facts and circumstances
evaluation of a recommendation makes it difficult to draw bright lines
around whether a particular recommendation would meet the Care
Obligation, the Commission is providing further interpretations and
guidance on how a broker-dealer could have a ``reasonable basis to
believe'' that a recommendation is in the best interest of its retail
customer and does not place the broker-dealer's interest ahead of the
retail customer's interest, as well as circumstances when we believe
that a broker-dealer could not have such a reasonable belief.

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

    \607\ See Proposing Release at 21610-21611.
    \608\ See related discussion in Section II.C.2.a and Section
II.C.2.b.
---------------------------------------------------------------------------

    While the factors noted above are examples of important factors to
consider based on the particular security or investment strategy, this
list is not exhaustive and additional factors, including those raised
by commenters, could be relevant depending on the particular security
or investment strategy being recommended and depending on the
particular retail customer's investment profile. For example, prior to
recommending a variable annuity to a particular retail customer,
broker-dealers should generally develop a reasonable basis to believe
that the retail customer will benefit from certain features of deferred
variable annuities, such as tax-deferred growth, annuitization, or a
death or living benefit.\609\
---------------------------------------------------------------------------

    \609\ Cf. also FINRA Rule 2330, Members' Responsibilities
Regarding Deferred Variable Annuities. See Transamerica November
2018 Letter.
---------------------------------------------------------------------------

    As stated in the Proposing Release, the importance of each factor
in determining the customer-specific component of the Care Obligation
will depend on the facts and circumstances of each recommendation.
Thus, one or more factors may have more or less relevance--or may not
be obtained or analyzed at all--if the broker-dealer has a reasonable
basis for determining that the factors are not relevant. Regardless of
which factors are evaluated--and equally important, which factors are
not evaluated--a broker-dealer must have a reasonable basis to believe
that the particular recommendation is in the best interest of the
particular retail customer and does not place the broker-dealer's
interest ahead of the retail customer's interest, consistent with the
interpretations and guidance provided. For example, recommendations of
the ``lowest cost'' security or investment strategy, without
consideration of other factors, could violate Regulation Best Interest.
In the same vein, it is important to consider that a recommendation may
be considered to be in a retail customer's best interest when viewed in
the context of the retail customer's portfolio even if seemingly not in
a retail customer's best interest when viewed in isolation (e.g.,
inclusion of what otherwise might be seen as a risky investment in the
portfolio of a risk-adverse customer, such as including hedging
instruments in a conservative portfolio).
    The customer-specific component of the Care Obligation will rest on
whether a broker-dealer had a reasonable basis to believe that the
recommendation was in the best interest of the particular retail
customer at the time of the recommendation, based on that retail
customer's investment profile and the potential risks, rewards, and
costs associated with the recommendation, and did not place the
financial or other interest of the broker, dealer, or such natural
person ahead of the interest of the retail customer. Thus, as discussed
further below, the importance of each factor, and which factors to
consider, will depend on the facts and circumstances of each
recommendation, as well as the specific security or investment
strategy.
    While the Care Obligation does not require broker-dealers to
document the basis for a recommendation, broker-dealers may choose to
take a risk based approach when deciding whether or not to document
certain recommendations. For example, broker-dealers may wish to
document an evaluation of a recommendation and the basis for the
particular recommendation in certain contexts, such as the
recommendation of a complex product, or where a recommendation may seem
inconsistent with a retail customer's investment objectives on its
face.\610\ Similarly, broker-dealers may consider using existing
compliance measures, such as generating and reviewing exception reports
that identify transactions that fall outside of firm-specified
parameters to help evaluate and review for compliance with the Care
Obligation. These measures are not meant to be exhaustive, but rather
are examples of the sorts of compliance tools and methods broker-
dealers should generally consider using in evaluating whether
recommendations are consistent with a retail customer's best interests.
---------------------------------------------------------------------------

    \610\ See FINRA Regulatory Notice 11-25 at FAQ 2 (explaining
that FINRA Rule 2111 (Suitability) permits firms to take a risk-
based approach with respect to documenting suitability
determinations). Regulation Best Interest similarly does not require
documentation; however, as noted above, we encourage broker-dealers
to take a risk-based approach when deciding whether or not to
document certain recommendations.
---------------------------------------------------------------------------

Retail Customer Investment Profile
    The Proposing Release would have required a ``Retail Customer
Investment Profile'' to include, but not be limited to, ``the retail
customer's age, other investments, financial situation and needs, tax
status, investment objectives, investment experience, investment time
horizon, liquidity needs, risk tolerance, and any other information the
retail customer may disclose to the broker, dealer, or a natural person
who is an associated person of a broker or dealer in connection with a
recommendation.'' \611\ The Proposing Release also explained that
broker-dealers would be required to exercise ``reasonable diligence''
to ascertain the

retail customer's investment profile as part of satisfying proposed
paragraph (a)(2)(i)(B), and that when retail customer information is
unavailable despite a broker-dealer's reasonable diligence to obtain
such information, a broker-dealer should consider whether it has
sufficient understanding of the retail customer to properly evaluate
whether the recommendation is in the retail customer's best
interest.\612\ Furthermore, under the proposed rule, a broker-dealer
would not meet its Care Obligation if it made a recommendation to a
retail customer for whom it lacks sufficient information to have a
reasonable basis to believe that the recommendation is in the best
interest of that retail customer based on such customer's investment
profile.
---------------------------------------------------------------------------

    \611\ Proposing Release at 21611 (noting the proposed definition
of Retail Customer Investment Profile was consistent with FINRA Rule
2111(a) (Suitability), which provides that ``A customer's investment
profile includes, but is not limited to, the customer's age, other
investments, financial situation and needs, tax status, investment
objectives, investment experience, investment time horizon,
liquidity needs, risk tolerance, and any other information the
customer may disclose to the member or associated person in
connection with such recommendation'').
    \612\ Id. This is similar to the approach articulated below, as
well as in FINRA Regulatory Notice 12-25, which outlines what
constitutes ``reasonable diligence'' under FINRA's suitability rule
in attempting to obtain customer-specific information and that the
reasonableness of the effort also will depend on the facts and
circumstances. See FINRA Regulatory Notice 12-25 at Q16. Moreover,
under Regulation Best Interest, as with the approach under FINRA's
suitability rule, broker-dealers may generally rely on a retail
customer's responses absent ``red flags'' indicating that the
information is inaccurate. Id.
---------------------------------------------------------------------------

    In response to this definition and the related discussion,
commenters identified several additional factors that they believed
should be included or discussed as part of a retail customer's
investment profile. For example, several commenters suggested adding
``longevity risk,'' ``retirement income needs,'' or ``lifetime income
needs'' as factors that should be included as part of an investor's
investment profile.\613\ Other commenters suggested additional factors,
such as, for trust accounts, considering the profile of trust
beneficiaries and not the trustee, or adding a retail customer's
``income profile.'' \614\
---------------------------------------------------------------------------

    \613\ See, e.g., IRI Letter, The Committee of Annuity Insurers
Letter, CCMC Letters, Jackson National Letter, Pacific Life August
2018 Letter, Lincoln Financial Letter, AXA Letter, Principal Letter;
Transamerica November 2018 Letter; Letter from Mark F. Halloran, VP
Managing Director, Business Development, Transamerica (Dec. 14,
2018) (``Transamerica December 2018 Letter'').
    \614\ See, e.g., Jackson National Letter, Lincoln Financial
Letter; Transamerica December 2018 Letter.
---------------------------------------------------------------------------

    While we agree that many of these factors will likely be relevant
to a broker-dealer's recommendation of various securities or investment
strategies involving securities, we are adopting the definition of
``retail customer investment profile'' as proposed. We believe that the
list of factors under ``retail customer investment profile'' is widely
understood and importantly, offers broker-dealers the flexibility to
consider additional factors as deemed necessary.\615\ Although many of
the additional factors cited by commenters may be relevant to
securities or investment strategy recommendations under certain facts
and circumstances, we are not persuaded that we should add any specific
factor or factors to the existing list of profile factors, particularly
given that the list of factors is non-exhaustive and broker-dealers can
consider additional factors as appropriate under the unique facts and
circumstances of each recommendation. Thus, for example, where a
broker-dealer making a variable annuity recommendation believes that
longevity risk is an important factor for a particular retail customer
and that such factor is necessary to develop a reasonable basis to
believe that the product is in the best interest of that retail
customer, that broker-dealer should consider and utilize that
factor.\616\ We believe that this approach appropriately provides
broker-dealers with a well-understood starting framework, but also
gives broker-dealers the ability to consider additional factors based
on the unique nature of its particular securities products, investment
strategies, and retail customers.
---------------------------------------------------------------------------

    \615\ See, e.g., CCMC Letters; Jackson National Letter; Pacific
Life August 2018 Letter; Committee of Annuity Insurers Letter; AXA
Letter.
    \616\ See, e.g., AXA Letter; Committee of Annuity Insurers
Letter; Pacific Life August 2018 Letter.
---------------------------------------------------------------------------

    Broker-dealers must obtain and analyze enough customer information
to have a reasonable basis to believe that the recommendation is in the
best interest of the particular retail customer. The significance of
specific types of customer information generally will depend on the
facts and circumstances of the particular case, including the nature
and characteristics of the product or strategy at issue. Where retail
customer information is unavailable despite a broker-dealer's
reasonable diligence, the broker-dealer should carefully consider
whether it has a sufficient understanding of the retail customer to
properly evaluate whether the recommendation is in the best interest of
that retail customer.\617\ In addition, a broker-dealer generally
should make a reasonable effort to ascertain information regarding an
existing customer's investment profile prior to the making of a
recommendation on an ``as needed'' basis--that is, where a broker-
dealer knows or has reason to believe that the customer's investment
profile has changed.\618\ The reasonableness of a broker-dealer's
efforts to collect information regarding a customer's investment
profile information depends on the facts and circumstances of a given
situation, and the importance of each factor may vary depending on the
facts and circumstances of the particular case.\619\ Under Regulation
Best Interest, as with the approach under FINRA's suitability rule,
broker-dealers may generally rely on a retail customer's responses
absent ``red flags'' indicating that the information is
inaccurate.\620\
---------------------------------------------------------------------------

    \617\ See supra footnotes 611-612 and accompanying text.
    \618\ See id.; see also Proposing Release at 21611-21612.
    \619\ See id.; see also FINRA Regulatory Notice 12-25 at Q16.
    \620\ See supra footnote 612.
---------------------------------------------------------------------------

    Moreover, as noted in the Proposing Release, one or more factors
may have more or less relevance, or may not be obtained or analyzed at
all if the broker-dealer has a reasonable basis for determining that
the factor is irrelevant to that particular best interest
determination. However, consistent with existing obligations, where a
broker-dealer determines not to obtain or analyze one or more of the
factors specifically identified in the definition of ``Retail Customer
Investment Profile,'' the broker-dealer should document its
determination that the factor(s) are not relevant components of a
retail customer's investment profile in light of the facts and
circumstances of the particular recommendation.\621\
---------------------------------------------------------------------------

    \621\ FINRA Rule 2111.04.
---------------------------------------------------------------------------

    Regulation Best Interest, as noted above, does not require
documentation of the basis for believing a particular recommendation
was in a particular retail customer's best interest.\622\ Nevertheless,
broker-dealers may wish to consider documenting the basis for
determining that the recommendation is in the best interest of the
retail customer when it is not evident from the recommendation
itself.\623\ Documentation by itself will not cure a recommendation in
circumstances in which a broker-dealer could not have reasonably
believed the recommendation was in the best interest of the retail
customer at the time the recommendation was made.\624\
---------------------------------------------------------------------------

    \622\ As discussed in Section II.C.1, we believe that the basis
for and risks associated with a broker-dealer's recommendations in
standardized terms (as opposed to individualized disclosure of the
basis for each recommendation made) is a material fact relating to
the scope and terms of the relationship that is required to be
disclosed under the Disclosure Obligation.
    \623\ See supra footnote 610 and accompanying text.
    \624\ See FINRA Rule 2111 (Suitability) FAQ.

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

Application of the Care Obligation--Reasonably Available Alternatives
and Otherwise Identical Securities
    In the Proposing Release, we provided guidance on what types of
recommendations would or would not be in the best interest of a
particular retail customer. In particular, the Proposing Release stated
that where a broker-dealer is choosing among identical securities
available to the broker-dealer, it would be inconsistent with the Care
Obligation to recommend the more expensive alternative for the
customer.\625\ Similarly, in the Proposing Release, we noted our belief
that it would be inconsistent with the Care Obligation if the broker-
dealer made a recommendation to a retail customer in order to: Maximize
the broker-dealer's compensation, further the broker-dealer's business
relationships, satisfy firm sales quotas or other targets, or win a
firm-sponsored sales contest.\626\
---------------------------------------------------------------------------

    \625\ Proposing Release at 21612.
    \626\ Id.
---------------------------------------------------------------------------

    We also stated that under the Care Obligation a broker-dealer
generally should consider reasonable alternatives, if any, offered by
the broker-dealer in determining whether it has a reasonable basis for
making the recommendation.\627\ The Proposing Release explained that
this approach would not require a broker-dealer to analyze all possible
securities, all other products, or all investment strategies to
recommend the single ``best'' security or investment strategy for the
retail customer, nor necessarily require a broker-dealer to recommend
the least expensive or least remunerative security or investment
strategy. Further, the Proposing Release indicated that under the Care
Obligation, when a broker-dealer recommends a more expensive security
or investment strategy over another reasonably available alternative
offered by the broker-dealer, the broker dealer would need to have a
reasonable basis to believe that the higher cost is justified (and thus
nevertheless is in the retail customer's best interest) based on other
factors (e.g., the product's or strategy's investment objectives,
characteristics (including any special or unusual features), liquidity,
risks and potential benefits, volatility and likely performance in a
variety of market and economic conditions), in light of the retail
customer's investment profile.\628\ Relatedly, we stated that a broker-
dealer could not meet the Care Obligation through disclosure
alone.\629\
---------------------------------------------------------------------------

    \627\ Proposing Release at 21608-21610.
    \628\ Proposing Release at 21612 (emphasis in original). We
similarly noted that ``when a broker-dealer recommends a more
remunerative security or investment strategy over another reasonably
available alternative offered by the broker-dealer, the broker-
dealer would need to have a reasonable basis to believe that--
putting aside the broker-dealer's financial incentives--the
recommendation was in the best interest of the retail customer based
on the factors noted [therein], in light of the retail customer's
investment profile. Nevertheless, this does not mean that a broker-
dealer could not recommend the more remunerative of two reasonably
available alternatives, if the broker-dealer determines the products
are otherwise both in the best interest of--and there is no material
difference between them from the perspective of--the retail
customer, in light of the retail customer's investment profile.''
Id. (emphasis in original).
    \629\ Id. at 21612-21613 (further explaining that ``where a
broker-dealer is choosing among identical securities with different
cost structures, we believe it would be inconsistent with the best
interest obligation for the broker-dealer to recommend the more
expensive alternative for the customer, even if the broker-dealer
had disclosed that the product was higher cost and had policies and
procedures reasonably designed to mitigate the conflict under the
Conflict of Interest Obligation, as the broker-dealer would not have
complied with the Care Obligation. Such a recommendation, disclosure
aside, would still need to be in the best interest of a retail
customer, and we do not believe it would be in the best interest of
a retail customer to recommend a higher-cost product if all other
factors are equal.'') (internal citations omitted).
---------------------------------------------------------------------------

    The Commission received numerous comments relating to the Proposing
Release's discussion of ``reasonably available alternatives'' and
regarding recommendations of ``otherwise identical securities.'' \630\
For example, commenters sought clarification regarding what factors
need to be considered in the evaluation, and also how the evaluation
could be performed in certain contexts, such as where a broker-dealer
operates with an open architecture framework, recommends only a limited
menu of products, or recommends only proprietary products.\631\ A
majority of the IAC recommended that Regulation Best Interest should be
clarified to require recommendations of ``the investments, investment
strategies, accounts, or services, from among those that [the broker-
dealers, investment advisers, and their associated persons] have
reasonably available to recommend, that they reasonably believe
represent the best available options for the investor'' and that a
``determination regarding the best reasonably available options should
be based on a careful review of the investor's needs and goals, as well
as the full range of the reasonably available products', strategies',
accounts', or services' features, including, but by no means limited to
cost.'' \632\ Several other commenters recommended that the Commission
confirm that Regulation Best Interest will not require broker-dealers
to offer an unlimited number of securities or investment
strategies.\633\ Commenters also expressed concern over whether the
consideration of ``reasonably available alternatives'' would
effectively require a broker-dealer to document the basis of any
recommendation, as well as concerns about disclosure's role in
satisfying the Care Obligation.\634\ Finally, a majority of the IAC and
other commenters sought clarification on whether broker-dealers were
required to recommend only the single ``best'' product.\635\
---------------------------------------------------------------------------

    \630\ See, e.g., Fidelity Letter; Vanguard Letter; MMI Letter;
BlackRock Letter.
    \631\ See, e.g., CFA August 2018 Letter; Wells Fargo Letter;
Fidelity Letter; Morgan Stanley Letter. See also LPL August 2018
Letter (suggesting that its representatives could not conduct a
meaningful comparison across ``all similar available securities''
and that, such recommendations would be subject to legal challenges
in hindsight).
    \632\ IAC 2018 Recommendation (emphasis in original).
    \633\ See LPL August 2018 Letter (recommending that the
Commission clarify that a financial professional can satisfy his or
her obligations under Regulation Best Interest, even if he or she
limits recommendations to a smaller number of product sponsors
because financial professionals participating on large platforms
may, in practice, be discouraged from conducting focused analysis of
product offerings, instead opting for a more cursory review of a few
high-level cost, risk, and performance metrics across all available
products). See also Fidelity Letter; Cetera August 2018 Letter;
SIFMA August 2018 Letter; Guardian August 2018 Letter; Prudential
Letter.
    \634\ See, e.g., Fidelity Letter; Wells Fargo Letter.
    \635\ See 2018 IAC Recommendation (``The Commission should
recognize that there will often not be a single best option and that
more than one of the available options may satisfy this standard,''
and that ``compliance should be measured based on whether the broker
or adviser had a reasonable basis for the recommendation at the time
it was made, and not on how the recommendation ultimately performed
for the investor. . . .''); see also SIFMA August 2018 Letter.
---------------------------------------------------------------------------

    The Care Obligation will require a broker-dealer to have a
reasonable basis to believe, based on its understanding of the
potential risks, rewards, and costs of the recommended security or
investment strategy involving securities, and in light of the retail
customer's investment profile, that the recommendation is in the best
interest of a particular retail customer and does not place the broker-
dealer's interest ahead of the retail customer's interest. As noted
above, determining what is in a retail customer's best interest is an
objective evaluation turning on the facts and circumstances of the
particular recommendation and the particular retail customer at the
time the recommendation is made.\636\
---------------------------------------------------------------------------

    \636\ As noted and further reiterated below, a broker-dealer
will not be required to recommend the single ``best'' of all
possible alternatives that might exist, in part because many
different options may in fact be in the retail customer's best
interest. See infra footnote 640 and accompanying text.
---------------------------------------------------------------------------

    Accordingly, as noted above, a broker-dealer would not satisfy the
Care Obligation by simply recommending the least expensive or least
remunerative

security without any further analysis of these other factors and the
retail customer's investment profile. A broker-dealer could recommend a
more expensive security or investment strategy if there are other
factors about the product that reasonably allow the broker-dealer to
believe it is in the best interest of the retail customer, based on
that retail customer's investment profile. Similarly, a broker-dealer
could recommend a more remunerative security or investment strategy if
the broker-dealer has a reasonable basis to believe that there are
other factors about the security or investment strategy that make it in
the best interest of the retail customer, in light of the retail
customer's investment profile.
    We also continue to have the view that, as part of determining
whether a broker-dealer has a reasonable basis to believe that a
recommendation is in the best interest of the retail customer, a
broker-dealer generally should consider reasonably available
alternatives offered by the broker-dealer. It is our view that such a
consideration is an inherent aspect of making a ``best interest''
recommendation, and is a key enhancement over existing broker-dealer
suitability obligations, which do not necessarily require a comparative
assessment among such alternatives.\637\ Similarly, this concept has
been applied in the context of guidance regarding suitability and
heightened supervision of complex products, stating that when broker-
dealers are recommending complex or costly products, they should first
consider whether less complex or costly products could achieve the same
objectives for their retail customers.\638\
---------------------------------------------------------------------------

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

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

    \639\ See, e.g., Morgan Stanley Letter (``Large firms with an
open architecture like Morgan Stanley offer an enormous range of
products to their clients. To take but one example, Morgan Stanley
offers approximately 300 large capitalization equity mutual funds to
its retail customers.''); see also Morningstar Letter; Primerica
Letter; ICI Letter; Chapman Letter (stating that ``identical'' is
too stringent because they believe all securities have
distinctions).
    \640\ Commenters suggesting different approaches acknowledged
this concern. See, e.g., IAC 2018 Recommendation (``[T]he Commission
should recognize there will often not be a single best option and
that more than one of the available options may satisfy this
standard.'').
    \641\ See LPL August 2018 Letter.
---------------------------------------------------------------------------

    In particular, we are not requiring a natural person who is an
associated person of the broker-dealer to be familiar with every
product on a broker-dealer's platform, particularly where a broker-
dealer operates in an open architecture framework or otherwise operates
a platform with a large number of products or options.\642\ Such a
requirement might not allow an associated person of a broker-dealer to
develop a proper understanding of every security or investment
strategy's potential risks, rewards, or costs, and thus it might not be
possible to fulfill the obligation set forth in paragraph
(a)(2)(ii)(A). Furthermore, such a requirement could encourage broker-
dealers to limit their product menus or otherwise restrict access to
products and services currently available to retail customers, which is
contrary to the purpose and goals of Regulation Best Interest.\643\
---------------------------------------------------------------------------

    \642\ Conversely, where a broker-dealer only has a few products,
an associated person of the broker-dealer may be expected to
understand and consider all of these options when recommending a
security or investment strategy. We recognize that this facts-and-
circumstances approach does not provide a clear bright-line rule;
however, we are providing further guidance below on a broker-
dealer's process for evaluating reasonably available alternatives
and the scope herein. Furthermore, nothing in this discussion
excuses a broker-dealer from satisfying the Care Obligation. An
associated person of the broker-dealer cannot use a large platform
as an excuse for not developing a proper understanding of a
recommended security or investment strategy's potential risks,
rewards, or costs.
    \643\ See LPL August 2018 Letter.
---------------------------------------------------------------------------

    As discussed above, the determination of whether a recommendation
is in the ``best interest'' of the retail customer and does not place
the interests of the broker-dealer ahead of the retail customer's
interest must be based on information reasonably known to the
associated person (based on her reasonable diligence, care, and skill)
at the time the recommendation is made. Accordingly, in fulfilling the
Care Obligation, the associated person should exercise reasonable
diligence, care, and skill to consider reasonably available
alternatives offered by the broker-dealer. This exercise would require
the associated person to conduct a review of such reasonably available
alternatives that is reasonable under the circumstances. Consistent
with the Compliance Obligation discussed below, a broker-dealer should
have a reasonable process for establishing and understanding the scope
of such ``reasonably available alternatives'' that would be considered
by particular associated persons or groups of associated persons (e.g.,
groups that specialize in particular product lines) in fulfilling the
reasonable diligence, care, and skill requirements under the Care
Obligation.
    What will be a reasonable determination of the scope of
alternatives considered will depend on the facts and circumstances, at
the time of the recommendation, including both the nature of the retail
customer and the retail customer's investment profile, and the
particular associated persons or groups of associated persons that are
providing the recommendations. With respect to broker-dealers that
materially limit the range of products or services that they recommend
to retail customers (e.g., limits its product offerings to only
proprietary or other limited menus of products), the Conflict of
Interest

Obligation provision requires broker-dealers to have reasonably
designed policies and procedures to identify and disclose the material
limitations and any conflicts of interest associated with such
limitations, and to prevent such limitations and associated conflicts
of interest from causing the broker-dealer or associated person to make
recommendations that place the interest of the broker-dealer or
associated person ahead of the interest of the retail customer.\644\
Similarly, where a broker-dealer offers numerous products on its
platform, a broker-dealer or an associated person could reasonably
limit the universe of ``reasonably available alternatives'' if there is
a reasonable process or methodology for limiting the scope of
alternatives or the universe considered for a particular retail
customer, particular category of retail customers, or the retail
customer base more generally.\645\
---------------------------------------------------------------------------

    \644\ See Section II.C.3. Broker-dealers would be required to
disclose the conflict of interest, as well as the material facts
associated with such a conflict pursuant to the Disclosure
Obligation provision as described in Section II.C.1.
    \645\ We note that where a broker-dealer (or an associated
person) limits the securities or investment strategies that are
considered as ``reasonably available alternatives'' from the
universe of securities or investment strategies involving securities
offered by the broker-dealer, this limitation may constitute a
material limitation placed on the securities or investment
strategies involving securities that may be recommended, which the
broker-dealer (or an associated person) would need to disclose and
address as provided in the Disclosure and Conflict of Interest
Obligations.
---------------------------------------------------------------------------

    In addition to the particular retail customer's investment profile,
we believe the scope of reasonably available alternatives considered
could depend upon a variety of factors, including but not limited to,
the associated person's customer base (including the general investment
objectives and needs of the customer base), the investments and
services available to the associated person to recommend (including
limitations due to licensing of the associated person), and other
factors such as specific limitations on the available investments and
services with respect to certain retail customers (e.g., product or
service income thresholds; product geographic limitations; or product
limitations based on account type, such as those only eligible for IRA
accounts). A reasonable process would not need to consider every
alternative that may exist (either outside the broker-dealer or on the
broker-dealer's platform) or to consider a greater number of
alternatives than is necessary in order for the associated person to
exercise reasonable diligence, care, and skill in providing a
recommendation that complies with the Care Obligation.
    Importantly, where all reasonably available alternatives considered
would be inconsistent with a retail customer's investment profile, a
broker-dealer would not be able to form a reasonable belief that the
best of these options is in the best interest of that retail customer.
All recommendations to retail customers of securities or investment
strategies are required to satisfy the Care Obligation, and broker-
dealers cannot use a limited product menu or a process to determine the
scope of reasonably available alternatives considered to justify a
recommendation that is not in the best interest of the retail customer.
    We recognize that the process by which a broker-dealer and its
associated persons develop and make recommendations to retail
customers, including the scope of reasonably available alternatives
considered, will depend upon a variety factors, including the nature of
the broker-dealer's business.\646\ The disclosure of this process
pursuant to the Disclosure Obligation will provide critical information
to retail customers and underscores our acknowledgment that we do not
expect every broker-dealer or associated person to follow the same
process. Instead, consistent with the Compliance Obligation, broker-
dealers and their associated persons must have a reasonable process for
developing and making recommendations to retail customers in compliance
with the Care Obligation, including the consideration of reasonably
available alternatives, which will depend on the facts and
circumstances.
---------------------------------------------------------------------------

    \646\ Accordingly, we believe that disclosure of this process is
of fundamental importance to a retail customer's understanding of
what services are being provided, and in deciding whether those
services are appropriate to the retail customer's needs and goals,
and have thus clarified that the basis for a broker-dealer's or an
associated person's recommendations as a general matter (i.e., what
might commonly be described as the firm's or associated person's
investment approach, philosophy or strategy) is a material fact
relating to the scope and terms of the relationship that must be
disclosed pursuant to the Disclosure Obligation. See Section II.C.1.
---------------------------------------------------------------------------

    We emphasize that what is in the ``best interest'' of a retail
customer depends on the facts and circumstances of a recommendation at
the time it is made, including matching the recommended security or
investment strategy to the retail customer's investment profile at the
time of the recommendation, and the process for coming to that
conclusion. Whether a broker-dealer has complied with the Care
Obligation will be evaluated based on the facts and circumstances at
the time of the recommendation (and not in hindsight) and will focus on
whether the broker-dealer had a reasonable basis to believe that the
recommendation is in best interest of the retail customer.
    Finally, broker-dealers or their associated persons are not
required to prepare and maintain documentation regarding the basis for
each specific recommendation, including an evaluation of a recommended
securities transaction or investment strategy against similar available
alternatives. In circumstances where the ``match'' between the retail
customer profile and the recommendation appears less reasonable on its
face (for example, where a retail customer's account objective is
preservation of income and the recommendation involves higher risk, or
where there are more significant conflicts of interest present), the
more important the process will likely be for a broker-dealer to
establish that it had a reasonable belief that the recommendation was
in the best interest of the retail customer and did not place the
broker-dealer's interest ahead of the retail customer. This could
include reasonably designed policies and procedures to establish
compliance with the Care Obligation, as required by the new Compliance
Obligation, and could include maintaining supporting documentation for
certain recommendations.\647\
---------------------------------------------------------------------------

    \647\ See supra footnote 610 and accompanying text.
---------------------------------------------------------------------------

Application of Care Obligation to Account Type Recommendations
    As discussed above, Regulation Best Interest will apply to
recommendations by a broker-dealer of a securities account type. Thus,
the Care Obligation will require a broker-dealer to have a reasonable
basis to believe that a recommendation of a securities account type
(e.g., brokerage or advisory, or among the types of accounts offered by
the firm) is in the retail customer's best interest at the time of the
recommendation and does not place the financial or other interest of
the broker-dealer ahead of the interest of the retail customer.\648\
---------------------------------------------------------------------------

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

    We believe broker-dealers would need to consider various factors in
determining whether a particular account is in a particular retail
customer's best interest. For example, broker-dealers generally should
consider: (1) The services and products provided in the account
(ancillary

services provided in conjunction with an account type, account
monitoring services, etc.); (2) the projected cost to the retail
customer of the account; (3) alternative account types available; (4)
the services requested by the retail customer; and (5) the retail
customer's investment profile. Moreover, retail customer-specific
factors, such as those identified in the definition of ``Retail
Customer Investment Profile,'' may not be applicable or available in
every context, and would depend on the facts and circumstances at the
time of account type recommendation. For example, one or more factors
may have more or less relevance, or information about those factors may
not be obtained or analyzed at all where the broker-dealer has a
reasonable basis for believing that a particular factor is or is not
relevant.\649\ In addition, as discussed above, we recognize that
factors other than cost may properly be considered when determining
whether an account is in a retail customer's best interest.\650\
---------------------------------------------------------------------------

    \649\ As discussed above, where a broker-dealer determines not
to obtain or analyze one or more of the factors specifically
identified in the definition of ``Retail Customer Investment
Profile,'' the broker-dealer generally should document its
determination that the factor(s) are not relevant components of a
retail customer's investment profile in light of the facts and
circumstances of the particular recommendation.
    \650\ See id.
---------------------------------------------------------------------------

    Where the financial professional making the recommendation is
dually registered (i.e., an associated person of a broker-dealer and a
supervised person of an investment adviser (regardless of whether the
professional works for a dual-registrant, affiliated firms, or
unaffiliated firms)) the financial professional would need to make this
evaluation taking into consideration the spectrum of accounts offered
by the financial professional (i.e., both brokerage and advisory taking
into account any eligibility requirements such as account minimums),
and not just brokerage accounts. For example, all other things being
equal, it may be in the retail customer's best interest to recommend a
brokerage account to the retail customer who intends to buy and hold a
long-term investment (e.g., maintain an account primarily composed of
bonds or mutual funds and has a stated buy-and-hold strategy), as
opposed to an advisory account (i.e., it may not be in the retail
customer's best interest in this context to pay an ongoing fee for a
security that he or she plans to hold to maturity).\651\ On the other
hand, it may not be in the retail customer's best interest to recommend
a brokerage account where the retail customer plans to engage in at
least a moderate level of trading and prefers to pay for advice in
connection with such trading on the basis of a consistent recurring
monthly or annual charge.\652\ Furthermore, where a retail customer
holds a variety of investments, or prefers differing levels of services
(e.g., both episodic recommendations from a broker-dealer and
continuous advisory services including discretionary asset management
from an investment adviser), it may be in the retail customer's best
interest to recommend both a brokerage and an advisory account.
---------------------------------------------------------------------------

    \651\ See id.
    \652\ See id. We reiterate that this is a facts and
circumstances determination, and that these examples are not meant
to provide a bright line rule, but rather to illustrate certain
considerations that a broker-dealer could consider when determining
whether a recommended account type is in the best interest of the
retail customer.
---------------------------------------------------------------------------

    Similarly, where the financial professional is only registered as
an associated person of a broker-dealer (regardless of whether that
broker-dealer entity is a dual-registrant or affiliated with an
investment adviser), he or she would need to take into consideration
only the brokerage accounts available.\653\ However, even if a broker-
dealer only offered brokerage accounts, the associated person would
nevertheless need to have a reasonable basis to believe that the
recommended account was in the best interest of the retail customer.
For example, if the retail customer were seeking a relationship where
the financial professional would have unlimited investment discretion
(i.e., having responsibility for a customer's trading decisions),\654\
the associated person would not have a reasonable basis to believe that
a brokerage account was in the best interest of the retail customer.
Thus, as with limited product menus, a limited selection of account
types would not excuse a broker-dealer from making a recommendation not
in the best interest of the retail customer.
---------------------------------------------------------------------------

    \653\ For example, if the natural person that is an associated
person of the broker-dealer is not registered as an investment
adviser representative, but is associated with a broker-dealer that
is a dual-registrant, that associated person would only need to
consider the brokerage accounts offered by the firm, and not the
firm's advisory accounts in making the recommendation.
    \654\ See Solely Incidental Interpretation.
---------------------------------------------------------------------------

Application of Care Obligation to IRA Rollovers and Related
Recommendations
    Regulation Best Interest also applies to recommendations to open an
IRA or to roll over assets into an IRA. Thus, the Care Obligation will
require a broker-dealer to have a reasonable basis to believe that the
IRA or IRA rollover is in the best interest of the retail customer at
the time of the recommendation and does not place the financial or
other interest of the broker-dealer ahead of the interest of the retail
customer, taking into consideration the retail customer's investment
profile and other relevant factors, as well as the potential risks,
rewards, and costs of the IRA or IRA rollover compared to the
investor's existing 401(k) account or other circumstances.\655\
---------------------------------------------------------------------------

    \655\ See infra Section II.C.2; see also FINRA Regulatory Notice
13-45 (outlining several considerations regarding IRA rollovers).
---------------------------------------------------------------------------

    When making a recommendation to open an IRA, or to roll over
workplace retirement plan assets into an IRA rather than keeping assets
in a previous employer's workplace retirement plan (or rolling over
assets to a new employer's workplace retirement plan), broker-dealers
should consider a variety of factors, the importance of which will
depend on the particular retail customer's needs and circumstances. In
addition to the Factors to Consider Regarding a Recommendation to a
Particular Retail Customer discussed above, as well as the Retail
Customer's Investment Profile, broker-dealers should consider a variety
of additional factors specifically salient to IRAs and workplace
retirement plans, in order to compare the retail customer's existing
account to the IRA offered by the broker-dealer. These factors should
generally include, among other relevant factors: Fees and expenses;
level of service available; available investment options; ability to
take penalty-free withdrawals; application of required minimum
distributions; protection from creditors and legal judgments; holdings
of employer stock; and any special features of the existing
account.\656\ With respect to available investment options, we caution
broker-dealers not to rely on, for example, an IRA having ``more
investment options'' as the basis for recommending a rollover. Rather,
as with other factors, broker-dealers should consider available
investment options in an IRA, among other relevant factors, in light of
the retail customer's current situation and needs in order to develop a
reasonable basis to believe that the rollover is in the retail
customer's best interest.
---------------------------------------------------------------------------

    \656\ See id.
---------------------------------------------------------------------------

    While these examples may be relevant to an analysis of available
options, this list is not meant to be exhaustive. Furthermore, each
factor generally should be analyzed with respect to a particular retail
customer in order for a broker-dealer to form a reasonable belief that
the recommendation is in the best

interest of that retail customer and does not place the financial or
other interest of the broker-dealer ahead of the interest of the retail
customer. Finally, as described above, certain factors may have more or
less relevance, or not be relevant at all, depending on the particular
facts and circumstances of each recommendation.
d. Have a Reasonable Basis To Believe That a Series of Recommended
Transactions, Even if in the Retail Customer's Best Interest When
Viewed in Isolation, Is Not Excessive and Is the Retail Customer's Best
Interest When Taken Together in Light of the Retail Customer's
Investment Profile and Does Not Place the Interest of the Broker-Dealer
Ahead of the Interest of the Retail Customer
    As proposed, the third component of the Care Obligation would
require a broker-dealer to exercise reasonable diligence, care, skill,
and prudence to have a reasonable basis to believe that a series of
recommended transactions, even if in the retail customer's best
interest when viewed in isolation, is not excessive and is in the
retail customer's best interest when taken together in light of the
retail customer's investment profile.\657\ The Proposing Release noted
that this requirement is intended to incorporate and enhance a broker-
dealer's existing ``quantitative suitability'' obligation by applying
the requirement irrespective of whether a broker-dealer exercises
actual or de facto control over a customer's account, thereby making
the obligation consistent with the current requirements for
``reasonable basis suitability'' and ``customer specific suitability.''
\658\
---------------------------------------------------------------------------

    \657\ Proposing Release at 21613.
    \658\ Proposing Release at 21613-21614.
---------------------------------------------------------------------------

    We received a few comments suggesting modifications to this
component of the obligation. For example, one commenter recommended the
Commission clarify the meaning of ``series of transactions,'' while a
second commenter requested a carve-out for ``active traders'' who are
``interested in trading individual stocks . . . with a great degree of
regularity.'' \659\ Another commenter maintained that the quantitative
suitability obligations should only apply to those accounts over which
the member firm has ``control,'' and that if the Commission does not
include the control element of FINRA Rule 2111 as part of the Care
Obligation, that the Commission ``should at a minimum confirm that this
requirement applies only to recommendations by a single associated
person, not across multiple associated persons at the firm who act
independently.'' \660\
---------------------------------------------------------------------------

    \659\ See Letter from Keith Lampi, President, Alternative and
Direct Investment Securities Association (``ADISA'') (Aug. 7, 2018)
(``ADISA Letter'') (recommending the Commission clarify the meaning
of ``series of transactions''); Letter from Joseph C. Cascarelli,
Corporate Counsel, Network 1 Financial Securities (Aug. 7, 2018)
(``Network 1 Letter'') (suggesting a ``carve-out exemption formula''
from Regulation Best Interest to accommodate investors and their
stockbrokers who specialize in ``active trading'').
    \660\ SIFMA August 2018 Letter.
---------------------------------------------------------------------------

    After considering these comments, the Commission is adopting the
proposed ``quantitative care'' component of the Care Obligation as
proposed. As noted in the Proposing Release, we believe that imposing
the quantitative care obligation without a ``control'' element would
provide consistency in the investor protections provided to retail
customers by requiring a broker-dealer to always form a reasonable
basis as to the recommended frequency of trading in a retail customer's
account--irrespective of whether the broker-dealer ``controls'' or
exercises ``de facto control'' over the retail customer's account.\661\
This would also be consistent with the other components of the Care
Obligation, which apply regardless of whether a broker-dealer
``controls'' or exercises ``de facto control'' over the retail
customers' account.
---------------------------------------------------------------------------

    \661\ See Proposing Release at 21613-21614.
---------------------------------------------------------------------------

    While the Commission appreciates the concern raised about ``active
traders'' and the concern relating to a retail customer that could
maintain several accounts at the same firm, we nevertheless believe
that retail customers could, and should, benefit from the protections
of this requirement, namely the protection from a broker-dealer
recommending a level of trading that is so excessive that the resulting
cost-to-equity ratio or turnover rate makes a positive return virtually
impossible.\662\ As we indicated in the Proposing Release, the fact
that a customer may have some knowledge of financial markets or some
``control'' should not absolve the broker-dealer of the ultimate
responsibility to have a reasonable basis to believe that any
recommendations it makes are in the best interest of the retail
customer.\663\ Where a retail customer expresses a desire for ``active
trading,'' \664\ a broker-dealer may take this factor into
consideration when evaluating a recommendation; however, the broker-
dealer will nevertheless need to reasonably believe that a series of
recommended transactions is in the best interest of the retail
customer. We further note that Regulation Best Interest does not
require a broker-dealer to refuse to accept a customer's order that is
contrary to the broker-dealer's recommendation. Nor does Regulation
Best Interest apply to self-directed or otherwise unsolicited
transactions by a retail customer, whether or not he or she also
receives separate recommendations from the broker-dealer.
---------------------------------------------------------------------------

    \662\ See id.
    \663\ See id.
    \664\ See Network 1 Letter.
---------------------------------------------------------------------------

    With respect to the concern about applying the requirement ``only
to recommendations by a single associated person, not across multiple
associated persons at the firm who act independently,'' \665\ we note
that both the firm and their associated persons have to comply with the
Care Obligation. If we took this commenter's suggestion, we are
concerned we would potentially create a loophole and a perverse outcome
that would allow for avoidance of the Care Obligation, and permit
potentially excessive trading, by encouraging recommendations across a
number of associated persons. We reiterate our position that,
consistent with the other components of the Care Obligation under the
Care Obligation, when a series of transactions is recommended to a
retail customer, a broker-dealer must evaluate whether the series of
recommended transactions places the broker-dealer's interest ahead of
the retail customer's--this is true for both the associated person
making the recommendation, as well as for the firm.\666\ This will
necessarily depend on the facts and circumstances of each particular
recommendation, and of each particular series of transactions; however,
we note that, as part of developing a retail customer's investment
profile, a broker-dealer is required to exercise reasonable diligence
to ascertain the retail customer's investment profile, which would
include seeking to obtain and analyze a retail customer's other
investments.\667\
---------------------------------------------------------------------------

    \665\ See SIFMA 2018 Letter.
    \666\ See Proposing Release at 21613-21614.
    \667\ See supra Section II.C.2.c.
---------------------------------------------------------------------------

    Finally, with respect to the meaning of series of recommended
transactions, what would constitute a ``series'' of recommended
transactions would depend on the facts and circumstances, and would
need to be evaluated with respect to a particular retail customer. In
other words, a broker-dealer would need to reasonably believe that the
level of trading (series of recommended transactions) is appropriate
for a particular retail customer, and thus a bright line definition
across all retail

customers would be unworkable. Moreover, providing a bright line
definition could encourage firms to focus on a particular number of
transactions rather than focusing on ensuring that a series of
recommendations, taken together, are in the best interest of the retail
customer. Finally, a ``series'' of recommended transactions is an
established term under the federal securities laws and SRO rules that
is evaluated in concert with existing guideposts, such as turnover
rate,\668\ cost-to-equity ratio,\669\ and use of in-and-out
trading,\670\ which have been developed over time and which serve as
indicators of excessive trading.
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    \668\ See, e.g., Carras v. Burns, 516 F.2d 251, 258 (4th Cir.
1975); Shearson Lehman Hutton Inc., 49 S.E.C. 1119, 1122 at footnote
10 (1989); Laurie Jones Canady, 54 S.E.C. 65, 74 (1999), Exchange
Act Release No. 41250 (Apr. 5, 1999) (using the turnover rate for
relevant period), petition denied, 230 F.3d 362 (D.C. Cir. 2000).
    \669\ See, e.g., Shearson Lehman, 49 S.E.C. at 1121 (stating
that ``[o]ne test for excessive trading is the relationship between
the account opening balance and the amounts of markups, commissions,
and margin charges''); Michael E. Tennenbaum, 47 S.E.C. 703 (Jan.19,
1982).
    \670\ See, e.g., Hecht v. Harris, Upham & Co., 283 F. Supp. 417,
435-36 (N.D. Cal. 1968), modified in part and aff'd, 430 F.2d 1202
(9th Cir. 1970); R.H. Johnson & Co., 36 S.E.C. 467 (1955); Behel,
Johnson & Co., 26 S.E.C. 163 (1947). Cody v. S.E.C., 693 F.3d 251,
260 (1st Cir. 2012).
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3. Conflict of Interest Obligation
    We proposed the Conflict of Interest Obligation to require a
broker-dealer entity \671\ to: (1) Establish, maintain, and enforce
written policies and procedures reasonably designed to identify, and
disclose, or eliminate all material conflicts of interest associated
with recommendations covered by Regulation Best Interest; and (2)
establish, maintain and enforce written policies and procedures
reasonably designed to identify and disclose and mitigate, or
eliminate, material conflicts of interest arising from financial
incentives associated with such recommendations. This proposed approach
reflected our view that establishing reasonably designed policies and
procedures is critical to identifying and addressing conflicts of
interest. In addition, the proposed approach would serve the
Commission's goal of addressing conflicts of interest that may harm
investors while providing flexibility to establish systems tailored to
broker-dealers' business models.
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    \671\ Unlike the Disclosure and Care Obligations, which apply to
a broker or dealer and to natural persons who are associated persons
of a broker or dealer, the Conflict of Interest Obligation (and the
Compliance Obligation discussed in Section II.C.4 below) applies
solely to the broker or dealer entity, and not to the natural
persons who are associated persons of a broker or dealer. For
purposes of discussing the Conflict of Interest Obligation and the
Compliance Obligation, the term ``broker-dealer'' refers only to the
broker-dealer entity, and not to such individuals. While the
Conflict of Interest Obligation applies only to the broker-dealer
entity, the conflicts of interest that the broker-dealer entity must
analyze are conflicts (as defined in paragraph (c)(3) of the rule)
between: (i) The broker-dealer entity and the retail customer, (ii)
the natural persons who are associated persons and the retail
customer, and (iii) the broker-dealer entity and the natural persons
who are associated persons.
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    The Commission solicited comment on the Conflict of Interest
Obligation, including the specific requirements to create policies and
procedures with respect to disclosure, mitigation, and elimination of
conflicts of interest. Commenters requested changes to several aspects
of the Conflict of Interest Obligation, including providing more
clarity and guidance surrounding when specific conflicts need to be
disclosed, mitigated or eliminated.\672\
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    \672\ See, e.g., SIFMA August 2018 Letter; Primerica Letter;
BISA Letter; CCMC Letters; Wells Fargo Letter.
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    In consideration of these comments, we are adopting the Conflict of
Interest Obligation with revisions to: (1) Create an overarching
obligation to establish written policies and procedures to identify and
at a minimum disclose, pursuant to the Disclosure Obligation, or
eliminate all conflicts of interest associated with the recommendation;
and (2) require broker-dealers to establish policies and procedures to
be reasonably designed to mitigate or eliminate certain identified
conflicts of interest.
    In addition to the overarching obligation, we specifically require
broker-dealers to establish, maintain, and enforce written policies and
procedures reasonably designed to: (i) Identify and mitigate any
conflicts of interest associated with recommendations that create an
incentive for a natural person who is an associated person of a broker
or dealer to place the interest of the broker or dealer, or such
natural person making the recommendation, ahead of the interest of the
retail customer; (ii)(A) identify and disclose any material limitations
placed on the securities or investment strategies involving securities
that may be recommended (i.e., only make recommendations of proprietary
or other limited range of products) to a retail customer and any
conflicts of interest associated with such limitations, in accordance
with the Disclosure Obligation, and (B) prevent such limitations and
associated conflicts of interest from causing the broker, dealer, or a
natural person who is an associated person of the broker or dealer to
make recommendations that place the interest of the broker, dealer, or
such natural person ahead of the interest of the retail customer; and
(iii) identify and eliminate any conflicts of interest associated with
sales contests, bonuses, and non-cash compensation that are based on
the sales of specific securities or specific types of securities within
a limited period of time.\673\
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    \673\ Rule 15l-1 under the Exchange Act.
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    Each of these changes and the requirements pursuant to the Conflict
of Interest Obligation is discussed in more detail below.
a. Reasonably Designed Policies and Procedures
    We proposed to require broker-dealers to establish reasonably
designed policies and procedures as we believe they are critical to
identifying and addressing conflicts of interest \674\ and helping
ensure compliance with the requirements to disclose conflicts of
interest pursuant to the Disclosure Obligation.\675\ In addition,
policies and procedures may minimize compliance costs that may be
passed on to retail customers.\676\ As discussed in the Proposing
Release, it would be reasonable for broker-dealers to use a risk-based
compliance and supervisory system rather than requiring a detailed
review of each recommendation and to have flexibility to tailor
policies and procedures to their specific business models. The
Commission also provided guidance on components a broker-dealer should
consider including in its program with regard to the Conflict of
Interest Obligation.\677\
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    \674\ See FSI August 2018 Letter (``Experience shows that
investors already ignore much of the enormous volume of regulatory
disclosures they are being provided. Instead, a more realistic
approach is to require broker-dealers to adopt written supervisory
procedures to detect and manage conflicts of interest, to avoid
those they can and take steps to mitigate the impact of those
conflicts that can't be avoided.'').
    \675\ See Proposing Release at Section II.D.3.b. See also CCMC
Letters (policies and procedures requirement should assist broker-
dealers in managing the potential impact of conflicts of interest);
FPC Letter (acknowledging the importance of firms' policies and
procedures when providing financial planning to act in the client's
best interest).
    \676\ See Proposing Release at Section II.D.3.b. See also
Cambridge Letter (``Cambridge believes the SEC's goals of
facilitating disclosure and mitigating material conflicts of
interest, while minimizing additional compliance costs that may be
passed on to the retail customers can best be accomplished by
requiring broker-dealers to adopt written supervisory procedures to
detect and manage conflicts of interest, to avoid those they can and
take steps to mitigate the impact of those conflicts that can't be
avoided.'').
    \677\ Proposing Release at Section II.D.3.b.
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    In response to the proposed policies and procedures requirement,
some

commenters asserted that it was an effective means of addressing
conflicts \678\ while others were concerned that the Commission was
providing too much flexibility in addressing conflicts of
interest.\679\ A few commenters expressed agreement with allowing a
flexible risk-based approach tailored to a broker-dealer's business
model as opposed to a detailed review of each recommendation.\680\ A
few commenters expressed concern with the Commission's assertion that
policies and procedures may minimize compliance costs that may be
passed on to retail customers, noting the uncertainty surrounding how
conflicts of interest should be addressed by policies and
procedures.\681\ One commenter suggested that the Commission should
adopt a safe harbor for the Conflicts of Interest Obligation by
demonstrating compliance with certain existing FINRA rules.\682\ As
discussed below under the new Compliance Obligation, some commenters
suggested that the policies and procedures requirement should apply to
aspects of the entire rule.\683\
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    \678\ See Fidelity Letter; SIFMA August 2018 Letter; Morgan
Stanley Letter.
    \679\ See, e.g., NASAA August 2018 Letter; CFA Institute Letter;
Galvin Letter; Better Markets August 2018 Letter (policies and
procedures should be ``actually designed'' to achieve those ends,
not just ``reasonably designed'' to do so). But see IRI Letter
(``The Conflict of Interest Obligation should be simplified and
streamlined to give BDs the flexibility to determine appropriate
steps to manage material conflicts.'').
    \680\ See Cambridge Letter; CCMC Letters. But see NASAA August
2018 Letter (suggesting the Commission reconsider the risk-based
approach to comply with its duties).
    \681\ See, e.g., Better Markets August 2018 Letter; CFA
Institute Letter.
    \682\ See AXA Letter.
    \683\ See, e.g., NASAA August 2018 Letter (suggesting that, at a
minimum, a firm's policies and procedures should require an analysis
of the costs and risks of a product as well as the client's
financial goals).
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    In consideration of the comments received, we are adopting the
approach with respect to reasonably designed policies and procedures to
identify and address conflicts of interest set forth in the proposal
substantially as proposed. As stated in the Proposing Release, we
believe that broker-dealers should have flexibility to tailor their
policies and procedures to their particular business model, focusing on
specific areas of their business that pose the greatest risk of
noncompliance and greatest risk of potential harm to retail customers
as opposed to a detailed review of each recommendation.\684\
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    \684\ See Proposing Release at II.D.3.b.
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    While we recognize a commenter's statement \685\ that policies and
procedures should be ``actually designed'' to address conflicts of
interest, we do not believe that the design of policies and procedures
should be measured against a standard of strict liability, but should
instead be measured against a standard of reasonableness. In addition,
we believe that policies and procedures are an effective tool to
identify and address conflicts of interest, and would allow the
Commission to identify and address potential compliance deficiencies or
failures (such as inadequate or inaccurate policies and procedures, or
failure to follow the policies and procedures) early on, reducing the
chance of retail customer harm.\686\ We also believe that there is no
one-size-fits all framework, and, as such, broker-dealers should have
flexibility to reasonably design their policies and procedures to
tailor them to account for their business model, given the structure
and characteristics of their relationships with retail customers,
including the varying levels and frequency of recommendations provided
and the types of conflicts that may be presented. This requirement of
``reasonably designed'' policies and procedures is also consistent with
Commission rules and regulations in other contexts, including under the
Advisers Act.\687\ Further, the Commission continues to believe that
while not required components, as an effective practice, broker-dealers
should consider including in their supervisory and compliance programs
the components listed in the Proposing Release, which may be relevant
in considering whether policies and procedures are reasonably
designed.\688\
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    \685\ See Better Markets August 2018 Letter.
    \686\ See infra footnote 809.
    \687\ See Rule 206(4)-7 under the Advisers Act. See also Section