required to act in the best interest of their customers under the
Exchange Act.\514\ An alternative that only provides disclosure of
conflicts of interest could therefore be less effective in increasing
retail customer protection in the absence of the best interest
requirement, relative to the proposed rule. Further, a disclosure-only
alternative puts the burden on the retail customer to understand the
disclosure and evaluate the magnitude of the conflict, without the
benefit of a best interest standard of conduct of proposed Regulation
Best Interest.\515\ Therefore, the Commission preliminarily believes
that a disclosure-only rule would be less effective in providing retail
customer

protection and reducing potential investor harm than proposed
Regulation Best Interest.
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    \514\ The disclosure-only alternative would not provide the Care
Obligation required by proposed Regulation Best Interest, as
discussed above. However, FINRA Rule 2111 would continue to set a
minimum requirement regarding the advice that broker-dealers provide
to their customers, and therefore, would continue to address the
competency of the advice provided by the broker-dealers.
    \515\ Relative to the disclosure-only alternative, broker-
dealers under proposed Regulation Best Interest would have to act in
the best interest of their investors, comply with the Care
Obligation, and would have to take actions to eliminate or disclose,
and where applicable, mitigate and disclose conflicts of interest.
---------------------------------------------------------------------------

2. Principles-Based Standard of Conduct Obligation
    As an alternative, the Commission could rely on a principles-based
standard of conduct, which could be developed by each broker-dealer
based on its business model rather than directly requiring conduct
standards. Under this alternative, broker-dealers would be required to
comply with a principles-based approach to providing recommendations
that are in the best interest of their customers, without expressly
being subject to requirements to disclose, mitigate, or eliminate
conflicts of interest. This alternative would focus on the competence
of broker-dealers to provide advice and would continue to rely on SRO
rules and the antifraud provisions of the federal securities laws and
SRO rules to address broker-dealer conflicts. A principles-based
standard of conduct would provide increased flexibility for broker-
dealers to tailor their recommendations to retail customers, subject to
the current obligations under the existing regulatory baseline,
discussed above, to make suitable recommendations. This approach could
impose lower compliance costs on regulated entities relative to the
requirements of the proposed rule.
    The Commission preliminarily believes that an approach that does
not include the express requirements of the Disclosure, Care, or the
requirements of the Conflict of Interest Obligations is likely to be
less effective at reducing harm to retail customers that arises from
conflicts of interest. Further, because each broker-dealer could have
its own principles-based approach to meeting its care obligation under
the Exchange Act, broker-dealers could interpret the standard
differently. Variations in retail customer protection could make it
difficult for retail customers to evaluate the standard of care offered
by a broker-dealer and compare these across broker-dealers.
    By contrast, Regulation Best Interest is designed to set a standard
applicable to all broker-dealers. In the absence of a requirement to
disclose or eliminate conflicts of interest or a requirement to
mitigate financial conflicts,\516\ as in proposed Regulation Best
Interest, some firms may not undertake such mitigation techniques,
either as they pertain to material conflicts of interest or those
related to financial incentives. Therefore, the Commission
preliminarily believes that a principles-based standard of conduct
approach on its own, would be less effective from a retail customer
protection standpoint than the proposed Regulation Best Interest. A
principles-based standard of conduct that obligates broker-dealers to
act in the best interest of their retail customers, without guidance on
what a best interest standard entails, is only one element that is
needed to reduce potential investor harm and that investor protection
is likely to be enhanced with the Disclosure, Care, and Conflict of
Interest Obligations in proposed Regulation Best Interest.
---------------------------------------------------------------------------

    \516\ As discussed above, under a principles-based care
obligation, broker-dealers would be required to continue to comply
with the existing regulatory baseline, including disclosure
obligations under the antifraud provisions of the federal securities
laws.
---------------------------------------------------------------------------

3. A Fiduciary Standard for Broker-Dealers
    As an alternative, the Commission could impose a fiduciary standard
on broker-dealers for retail customers.\517\ Fiduciary standards vary
among investment advisers, banks, acting as trustees or fiduciaries, or
ERISA plan providers, but fiduciaries are generally required to act
with a duty of care and duty of loyalty to their clients.
---------------------------------------------------------------------------

    \517\ Retail customers would consist of the same set of
investors as in proposed Regulation Best Interest.
---------------------------------------------------------------------------

    As discussed above, any prescribed standard of conduct, such as a
fiduciary standard, can seek to address the principal-agent problem
between retail customers and firms and financial professionals, whereby
principals (retail customers) are concerned that their agents (firms
and financial professionals) will not act in the best interest of the
principal. In the context of investment advice, firms and financial
professionals may have incentives (financial or otherwise) to provide
advice to their retail customers that benefits the firm or the
financial professional but may be suboptimal from the retail customer's
perspective. For example, a financial professional might offer costly
products, when low(er) cost alternatives are reasonably available, may
offer affiliated or proprietary products, or may trade more or less
frequently than is beneficial to the retail customer. As discussed
above in the discussion of broad economic considerations, retail
customers may not be able to adequately monitor the firms or financial
professionals to ensure that their agents are working in the retail
customer's best interest. Therefore, regardless of the type of
investment professional providing the advice, that advice may be
conflicted and potentially harm retail customers.
    Although conflicts of interest may exist in any type of
relationship, the nature of such conflicts vary depending on the type
of firm or financial professional that provides the advice. Broker-
dealers and registered representatives generally provide financial
advice at the transactional level, and the nature of the relationship
between customers and broker-dealers and the level of monitoring by
broker-dealers tends to be episodic, rather than ongoing. Investment
advisers and their representatives commonly provide ongoing monitoring
to their clients. Because of the differences in the nature of the
relationship, the conflicts that are likely to arise from broker-
dealers (e.g., offering mutual funds with large front-end loads or
churning retail customer accounts) would be different from those that
arise for many standalone investment advisers (e.g., so-called
``reverse churning'') but may be the same as the conflicts faced by
advisers when the advisers, affiliates, or third-party broker-dealers
with which advisory personnel are associated receive compensation in a
broker-dealer capacity.\518\
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    \518\ As discussed above, nearly 80% of investment adviser
representatives are also registered representatives of broker-
dealers; thus, those representatives and their firms, depending on
the capacity in which the representatives provide advice, could face
similar conflicts. Further, nearly 75% of total investment adviser
assets under management are associated with investment advisers that
have a broker-dealer affiliate. See Section IV.C.1.
---------------------------------------------------------------------------

    Over time, different bodies of laws and standards have emerged that
are generally tailored to the different business models of broker-
dealers and investment advisers and that provide retail customer
protection specific to the relationship types and business models to
which they apply. While obligations for broker-dealers and investment
advisers that arose from common law may appear similar, each set of
laws and obligations has emerged independently. Moreover, such
differences between business models have provided retail customers with
choice about the type of investment advice that they seek and how they
pay for such advice.
    A fiduciary standard for broker-dealers could produce greater
uniformity between broker-dealers' and investment advisers' standards.
A uniform fiduciary standard for broker-dealers and investment advisers
could bring more uniformity to the professional standards of conduct
regarding advice provided to retail customers. A uniform standard could
potentially reduce certain conflicts and increase disclosure of others,
thereby enhancing the quality of such advice,

lowering the possibility of harm to investors, and potentially reducing
retail customer confusion with respect to investment advice. The
Commission preliminarily believes such uniformity would likely affect
the market for investment advice provided by broker-dealers; retail
customer choice; costs of investment advice; and could lead to the
potential loss of differentiation between two important business
models, each of which can serve a valuable function for retail
customers. This alternative also could have economic effects on both
retail customers and the industry, particularly if payment choice,
account choice, or product choice diminishes as a result. Regardless of
the form of a new fiduciary standard for broker-dealers, legal
certainty would be an important factor for broker-dealers and other
providers of investment advice.
    As discussed above, the broker-dealer and investment adviser models
have emerged to meet the investing and advice needs of particular
clienteles with varying needs for monitoring, advice, and services.
Given the different business models, different standards have emerged
to provide retail customer protection reflective of the business model.
We preliminarily believe that a uniform fiduciary standard that would
attempt to fit a single approach to retail customer protection to two
different business models is unlikely to provide a tailored solution to
the conflicts that uniquely arise for either broker-dealers or
investment advisers.\519\ Moreover, such an alternative would likely
undermine efforts to preserve the ability of broker-dealers to employ
business models that are distinct from investment advisers', and could
thereby limit retail customer choice with respect to investment advice.
This differentiated approach to customer protection is more likely to
provide more appropriate investor protection commensurate with the
risks inherent in each of those business models. The nature of retail
investors' relationships with providers of financial advice is likely
to differ between broker-dealers and investment advisers (e.g., broker-
dealers are more likely to provide advice on an episodic basis), which
has led to the emergence of different regulatory regimes, each designed
to address conflicts of interest that may arise as a result of a given
business model. Therefore, the Commission preliminarily believes that
it is appropriate to maintain separate regulatory standards for broker-
dealers and investment advisers, while proposing to incorporate and go
beyond existing levels of retail customer protection for broker-dealer
customers through Regulation Best Interest and Form CRS Relationship
Summary Disclosure.
---------------------------------------------------------------------------

    \519\ An example of a uniform fiduciary standard is the staff
recommendation in the 913 Study. See supra note 38 and accompanying
text.
---------------------------------------------------------------------------

4. Enhanced Standards Akin to Conditions of the BIC Exemption
    The Commission could alternatively propose a fiduciary standard
coupled with a series of disclosure and other requirements akin to the
full complement of conditions of the DOL's BIC Exemption adopted in
connection with the DOL Fiduciary Rule, which would apply to broker-
dealers when making investment recommendations for all types of retail
accounts rather than only in connection with services to retirement
accounts.\520\ The key conditions of the BIC Exemption are described in
some detail in Section I.A.2. Below, we consider the tradeoffs to
retail customers, broker-dealers, and other market participants of an
alternative that would mirror the key conditions of the BIC
Exemption.\521\
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    \520\ As discussed supra Section I.A.2., broker-dealers and
their associated persons who provide fiduciary investment advice to
retirement accounts (including ERISA-covered plans and participants,
as well as IRAs) are not required to comply with the BIC Exemption
to the extent that they are able to adopt an alternate approach to
avoiding non-exempt prohibited transactions.
    \521\ The DOL also adopted the Impartial Conduct Standards in
the Principal Transactions Exemption and certain other PTEs relating
to the DOL Fiduciary Rule, see DOL Fiduciary Rule Release, supra
note 49, 81 FR at 20991; these other PTEs operate with additional
and/or different conditions from the BIC Exemption. This discussion
only considers the conditions of the BIC Exemption, because it
provides an example of the types of information and detail required
under PTEs related to the DOL Fiduciary Rule, and we understand that
most broker-dealers providing services to retirement accounts
generally would rely on the BIC Exemption. As discussed above, the
DOL Fiduciary Rule was vacated by the United States Court of Appeals
for the Fifth Circuit on March 15, 2018. See supra note 51.
---------------------------------------------------------------------------

    The alternative of requiring broker-dealers to adopt a fiduciary
standard coupled with a series of disclosure and other requirements
akin to the full complement of conditions of the DOL's BIC Exemption
for all retail customer accounts and not solely with respect to
retirement assets could likely have economic effects for broker-
dealers. Given that some broker-dealers have already adopted some of
the conditions of the DOL's BIC Exemption for retirement accounts and
may have already implemented the conditions for non-retirement
accounts, the incremental costs could be low under such an alternative.
However, the incremental costs could be reduced only to the extent that
broker-dealers have already begun to implement the conditions of the
DOL's BIC Exemption. Further, as discussed above, some components of
the DOL's BIC Exemption are already part of the broker-dealer
regulatory framework; therefore, any potential economic effects
associated with such conditions would be reduced.
    An alternative that would impose on broker-dealers a fiduciary
standard coupled with set of requirements akin to the full complement
of the BIC Exemption conditions could drive up costs to retail
customers of obtaining investment advice from broker-dealers, and could
cause some retail customers to forgo advisory services through broker-
dealers if they were priced out of the market.\522\ For example, if the
costs associated with complying with a set of requirements akin to the
full complement of conditions under BIC Exemption are large, broker-
dealers could transition away from commission-based brokerage accounts
to fee-based advisory accounts. \523\ To the extent that such an
outcome increases the costs associated with investment advice, some
retail customers may determine to exit the market for financial advice.
---------------------------------------------------------------------------

    \522\ See SIFMA Study. See also the ABA survey and the Financial
Services Roundtable survey, supra note 456.
    \523\ As discussed in the baseline section, the average fees
associated with broker-dealers' commission-based accounts are
significantly lower than the average fees associated with fee-based
accounts of registered investment advisers.
---------------------------------------------------------------------------

    Alternatively, as costs of complying with a fiduciary standard
coupled with a set of requirements akin to the full complement of BIC
Exemption conditions increase, some broker-dealers may abandon certain
subsets of retail customer accounts, which would similarly deprive some
broker-dealer customers of investment advice. A set of requirements
that are akin to the conditions of the BIC Exemptions, were they to be
imposed upon broker-dealers for all retail customer accounts, would
also likely have competitive effects for both broker-dealers and
investment advisers,\524\ and could cause exit or consolidation among
both broker-dealers and investment advisers that provide investment
advice,\525\ which could further reduce the overall level of investment
advice available to retail

customers.\526\ Further, for those broker-dealers that do not fully
exit the market, implementing a set of requirements that are akin to
the conditions of the BIC Exemption could lead to some broker-dealers
transitioning from a broker-dealer business model to an investment
adviser business model. Although this alternative could increase the
competition between investment advisers and broker-dealers subject to a
fiduciary standard and BIC Exemption-like conditions, any reduction in
the costs of investment advice due to a potential increase in the
supply of providers would like to be mitigated as the costs to broker-
dealers to follow such standards would likely be large and could raise
the costs associated with the provision of investment advice.\527\
---------------------------------------------------------------------------

    \524\ Investment advisers, depending on how they are
compensated, generally would not have to comply with the full set of
obligations of the BIC Exemption, thereby reducing the costs to such
firms, and providing incentives for broker-dealers to switch
customers from transaction-based accounts to advisory accounts.
    \525\ In addition to competitive effects for broker-dealers and
investment advisers, any change in the competitive environment is
likely to have an impact on other providers of financial advice,
including banks, and trust companies.
    \526\ As discussed above in Section IV.D, proposed Regulation
Best Interest also could have competitive effects between broker-
dealers and investment advisers.
    \527\ One of the main critiques of the BIC Exemption arises from
the increased legal uncertainty and associated increased litigation
risk for broker-dealers, as discussed above.
---------------------------------------------------------------------------

    The Commission preliminarily believes that requiring broker-dealers
to comply with a fiduciary standard coupled with a set of requirements
akin to the full complement of conditions under the BIC Exemption could
impose costs on broker-dealers and impact retail customers and the
market for investment advice; however, the Commission is unable to
quantify the costs and benefits associated with this alternative.
Moreover, the Department of Labor has a different regulatory focus than
the Commission; therefore, a wholesale incorporation of conditions
consistent with the BIC Exemption is not entirely consistent with the
regulatory approach of the Commission.

F. Request for Comment

    The Commission requests comment on all aspects of this initial
economic analysis, including whether we have correctly identified the
problem, its magnitude, and the set of reasonably available solutions
and alternative approaches. We also request comment on whether the
analysis has: (i) Identified all benefits and costs, including all
effects on efficiency, competition, and capital formation; (ii) given
due consideration to each benefit and cost, including each effect on
efficiency, competition, and capital formation; and (iii) identified
and considered reasonable alternatives to the proposed regulations. We
request and encourage any interested person to submit comments
regarding the proposed regulations, our analysis of the potential
effects of the proposed regulations, and other matters that may have an
effect on the proposed regulations. We request that commenters identify
sources of data and information as well as provide data and information
to assist us in analyzing the economic consequences of the proposed
regulations. We also are interested in comments on the qualitative
benefits and costs we have identified and any benefits and costs we may
not have discussed. We also request comment on the assumptions
underlying our analysis and cost estimates.
    In addition to our general request for comment on the economic
analysis associated with the proposed regulations, we request specific
comment on certain aspects of the proposal:
     We request comment on our characterization of the
relationship between a broker-dealer and a retail customer. Do
commenters agree with our principal-agent characterization of this
relationship? Are there different ways of characterizing this
relationship that we should consider? Is the concept of ``gains from
trade'' appropriate for capturing the economic impact of the proposed
regulation on the broker-dealers and their retail customers? Are there
alternative economic concepts that we should consider? Is the example
that illustrates how the concept of ``gains for trade'' works useful
for understanding the economic impacts of the proposed regulation? Can
commenters suggest alternative examples?
     We request comment on our assumptions related to
identifying broker-dealers that are likely to have retail customers. If
only ``sales'' activity is marked on Form BR, is it appropriate to
assume that a firm has both ``retail'' and ``institutional'' sales
activities?
     We request comment on the financial incentives provided by
broker-dealers to registered representatives and other associated
persons of the broker-dealer. Are the ranges provided reasonable? Are
there other types of compensation arrangements or financial incentives
that are provided to associated persons of broker-dealers, particularly
registered representatives, which are not included in the baseline?
Please be specific and provide data and analysis to support your views.
     We request comment on our characterization of the benefits
of proposed Regulation Best Interest. We believe that the proposed rule
achieves its main benefits by ameliorating the agency conflict between
broker-dealers and retail customers. Do commenters agree with our
characterization of the benefits? Are there other benefits of the
proposed rule that have not been identified in our discussion and that
warrant consideration? Are the assumptions that form the basis of our
analysis of the benefits appropriate? Can commenters provide data that
supports or opposes these assumptions? Can commenters provide data that
would help the Commission quantify the magnitude of the benefits
identified in our discussion or other benefits that we missed to
identify in our discussion and that warrant consideration?
     We request comment on our characterization of the costs of
the proposed Regulation Best Interest. We believe that the best
interest obligation through its component obligations would impose
direct costs on broker-dealers. Furthermore, we believe that depending
on how broker-dealers chose to comply with the best interest
obligation, the proposed rule may impose costs on retail customers. Do
commenters agree with our characterization of the costs? Are there
other costs of the proposed rule that have not been identified in our
discussion and that warrant consideration? Are the assumptions that
form the basis of our analysis of the costs appropriate? Can commenters
provide data that supports or opposes these assumptions? Can commenters
provide data that would help the Commission quantify the magnitude of
the costs identified in our discussion or other costs that we missed to
identify in our discussion and that warrant consideration?
     How do commenters anticipate that the benefits and costs
of the proposed rule will be shared between broker-dealers and their
retail customers? Please be specific and provide data and analysis to
support your views.
     Are there any effects on efficiency, competition, and
capital formation that are not identified or are misidentified in our
economic analysis? Please be specific and provide data and analysis to
support your views.
     What would the costs for broker-dealers be if the
provision of discretionary investment advice, whether or not limited in
scope, were not to be considered ''solely incidental'' to broker-
dealer's business under Advisers Act rule 202(a)(11)(C)? Would there be
any costs or benefits to retail customers? How would the market for the
provision of financial advice change? Would dually-registered firms
treat discretionary accounts as brokerage accounts?
     Do commenters believe that the alternatives the Commission
considered are appropriate? Are there other reasonable alternatives
that the

Commission should consider? If so, please provide additional
alternatives and how their costs and benefits would compare to the
proposal.

V. Paperwork Reduction Act Analysis

    Certain provisions of the proposed rules and rule amendments would
impose new ``collection of information'' requirements within the
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\528\
---------------------------------------------------------------------------

    \528\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The Commission is submitting the proposed rules and rule amendments
to the Office of Management and Budget (``OMB'') for review and
approval in accordance with the PRA.\529\ The titles for these
collections of information are: (1) ``Regulation Best Interest;'' (2)
Rule 17a-3--Records to be Made by Certain Exchange Members, Brokers and
Dealers (OMB control number 3235-0033); \530\ and (3) Rule 17a-4--
Records to be Preserved by Certain Brokers and Dealers (OMB control
number 3235-0279).\531\ OMB has not yet assigned a control number to
the collection of information for ``Regulation Best Interest.'' An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid OMB control number.
---------------------------------------------------------------------------

    \529\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    \530\ See 17 CFR 240.17a-3. The proposed addition of paragraph
(a)(25) to Rule 17a-3 would amend the existing PRA for Rule 17a-3.
    \531\ See 17 CFR 240.17a-4. The Proposed Amendment to Rule 17a-
4(e)(5) would amend the existing PRA for Rule 17a-4.
---------------------------------------------------------------------------

    Proposed pursuant to the Commission's authority under the Dodd-
Frank Act and the Exchange Act, Regulation Best Interest would: (1)
Improve disclosure about the scope and terms of the broker-dealer's
relationship with the retail customer, which would foster retail
customers' understanding of their relationship with a broker-dealer;
(2) enhance the quality of recommendations provided by establishing an
express best interest obligation under the federal securities laws; (3)
enhance the disclosure of a broker-dealer's material conflicts of
interest; (4) and establish obligations that require mitigation, and
not just disclosure, of conflicts of interest arising from financial
incentives associated with broker-dealer recommendations. Generally, in
crafting proposed Regulation Best Interest, we aimed to provide broker-
dealers flexibility in determining how to satisfy the component
obligations. For purposes of this analysis, we have made assumptions
regarding how a broker-dealer would comply with the obligations of
Regulation Best Interest, as well as the proposed amendments to Rule
17a-3(a)(25) and Rule 17a-4(e)(5).

A. Respondents Subject to Proposed Regulation Best Interest and
Proposed Amendments to Rule 17a-3(a)(25), Rule 17a-4(e)(5)

1. Broker-Dealers
    Proposed Regulation Best Interest would impose a best interest
obligation on a broker-dealer when making recommendations of any
securities transaction or investment strategy involving securities to
``retail customers.'' Except where noted, we have assumed that a
dually-registered firm, already subject to the Investment Advisers Act,
would be subject to new, distinct burdens under proposed Regulation
Best Interest.
    As of December 31, 2017, 3,841 broker-dealers were registered with
the Commission--either as standalone broker-dealers or as dually-
registered entities. Based on data obtained from Form BR, the
Commission preliminarily believes that approximately 74.4% of this
population, or 2,857 broker-dealers have retail customers and therefore
would likely be subject to Regulation Best Interest and the proposed
amendments to Rules 17a-3(a)(25) and 17a-4(e)(5).\532\
---------------------------------------------------------------------------

    \532\ As of December 31, 2017, 3,841 broker-dealers filed Form
BD. Retail sales by broker-dealers were obtained from Form BR.
---------------------------------------------------------------------------

2. Natural Persons who are Associated Persons of Broker-Dealers
    As with broker-dealers, proposed Regulation Best Interest would
impose a best interest obligation on natural persons who are associated
persons of broker-dealers, when making recommendations of any
securities transaction or investment strategy involving securities to
``retail customers.''
    The Commission preliminarily believes that approximately 435,071
natural persons would qualify as retail-facing, licensed
representatives at standalone broker-dealers or dually-registered
firms,\533\ and would therefore likely be subject to proposed
Regulation Best Interest, and the proposed amendments to Rules 17a-
3(a)(25) and 17a-4(e)(5).\534\
---------------------------------------------------------------------------

    \533\ See Section IV.B.1, supra, at Table 5. This estimate is
based on the following calculation: (494,399 total licensed
representatives (including representatives of investment advisers))
x (12% (the percentage of total licensed representatives who are
standalone investment adviser representatives)) = 59,328
representatives at standalone investment advisers. To isolate the
number of representatives at standalone broker-dealers and dually-
registered firms, we have subtracted 59,328 from 494,399, for a
total of 435,071 retail-facing, licensed representatives at
standalone broker-dealers or dually-registered firms.
    \534\ Unless otherwise noted, for purposes of the PRA, we use
the term ``registered representatives'' to refer to associated
persons of broker-dealers who are registered, have series 6 or 7
licenses, and are retail-facing, and we use the term ``dually-
registered representatives of broker-dealers'' to refer to
registered representatives who are dually-registered and are
associated persons of a standalone broker-dealer (who may be
associated with an unaffiliated investment adviser) or a dually-
registered broker-dealer.
---------------------------------------------------------------------------

B. Summary of Collections of Information

    Regulation Best Interest would require broker-dealers to act in the
best interest of a retail customer when recommending any securities
transaction or investment strategy involving securities to a retail
customer. As discussed above, proposed Regulation Best Interest would
specifically provide that this best interest obligation shall be
satisfied if: (1) The broker, dealer or natural person who is an
associated person of a broker or dealer, prior to or at the time of a
recommendation, reasonably discloses to the retail customer, in
writing, the material facts relating to the scope and terms of the
relationship with the retail customer, including all material conflicts
of interest that are associated with the recommendation; (2) the
broker, dealer or natural person who is an associated person of a
broker or dealer, exercises reasonable diligence, care, skill, and
prudence in making a recommendation; (3) the broker or dealer
establishes, maintains, and enforces written policies and procedures
reasonably designed to identify and at a minimum disclose, or
eliminate, all material conflicts of interest that are associated with
such recommendations; and (4) the broker or dealer establishes,
maintains, and enforces 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.
    Furthermore, the proposed addition of paragraph (a)(25) to Rule
17a-3 would impose new record-making obligations on broker-dealers
subject to Regulation Best Interest, while the Proposed Amendment to
Rule 17a-4(e)(5) would impose new record retention obligations on
broker-dealers subject to Regulation Best Interest.
    The obligations arising under Regulation Best Interest, the
Proposed Amendment to Rule 17a-3(a)(25), and the Proposed Amendment to
Rule 17a-4(e)(5) would give rise to distinct collections of information
and

associated costs and burdens for broker-dealers subject to the proposed
rules.
    The collections of information associated with these proposed rules
and proposed rule amendments are described below.
1. Conflict of Interest Obligations
    Regulation Best Interest would require a broker-dealer entity \535\
to establish, maintain, and enforce written policies and procedures
reasonably designed to identify and at a minimum disclose, or
eliminate, all material conflicts of interest that are associated with
a recommendation. Second, Regulation Best Interest would require a
broker-dealer to establish, maintain, and enforce written policies and
procedures reasonably designed to identify and disclose and mitigate,
or eliminate, material conflicts of interest arising from financial
incentives associated with a recommendation.
---------------------------------------------------------------------------

    \535\ As discussed above in Section II.D.3, the proposed
Conflict of Interest Obligation 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, the term ``broker-dealer'' refers
only to the broker-dealer entity, and not to such individuals.
---------------------------------------------------------------------------

    Written policies and procedures developed pursuant to the Conflict
of Interest Obligations of proposed Regulation Best Interest would help
a broker-dealer develop a process, relevant to its retail customers and
the nature of its business, for identifying material conflicts of
interest, and then determining whether to eliminate, or disclose and/or
mitigate, the material conflict and the appropriate means of
eliminating, disclosing, and/or mitigating the conflict. As a result of
a broker-dealer's eliminating, disclosing, and/or mitigating the
effects of conflicts of interest on broker-dealer recommendations,
retail customers would more likely receive recommendations in their
best interest. In addition, the retention of written policies and
procedures would generally: (1) Assist a broker-dealer in supervising
and assessing internal compliance with Regulation Best Interest; and
(2) assist the Commission and SRO staff in connection with examinations
and investigations.\536\
---------------------------------------------------------------------------

    \536\ Any written policies and procedures developed pursuant to
proposed Regulation Best Interest would be required to be retained
pursuant to Exchange Act Rule 17a-4(e)(7), which requires broker-
dealers to retain compliance, supervisory, and procedures manuals
(and any updates, modifications, and revisions thereto) describing
the policies and practices of the broker-dealer with respect to
compliance with applicable laws and rules, and supervision of the
activities of each natural person associated with the broker-dealer,
for a specified period of time. The record retention requirements of
Rule 17a-4(e)(7) include any written policies and procedures that
broker-dealers may produce pursuant to Regulation Best Interest's
Conflict of Interest Obligations. The costs and burdens associated
with Rule 17a-4(e)(7) will be updated in connection with the next
renewal for the PRA.
---------------------------------------------------------------------------

    Following is a detailed discussion of the estimated costs and
burdens associated with broker-dealers' Conflict of Interest
Obligations.
a. Written Policies and Procedures
(1) Initial Costs and Burdens
    We believe that most broker-dealers have policies and procedures in
place to address material conflicts, but they do not necessarily have
written policies and procedures regarding the identification and
management of conflicts as proposed in Regulation Best Interest. To
initially comply with this obligation, we believe that broker-dealers
would employ a combination of in-house and outside legal and compliance
counsel to update existing policies and procedures.\537\ We assume
that, for purposes of this analysis, the associated costs and burdens
would differ between small and large broker-dealers, as large broker-
dealers generally offer more products and services and therefore would
need to evaluate and address a greater number of potential conflicts.
Based on FOCUS Report data,\538\ we estimate that, as of December 31,
2017, approximately 802 broker-dealers are small entities under the
RFA. Therefore, we estimate that 2,055 broker-dealers would qualify as
large broker-dealers for purposes of this analysis.\539\
---------------------------------------------------------------------------

    \537\ Throughout this PRA analysis, the burdens on in-house
personnel are measured in terms of burden hours, and external costs
are expressed in dollar terms.
    \538\ FOCUS Reports, or ``Financial and Operational Combined
Uniform Single'' Reports, are monthly, quarterly, and annual reports
that broker-dealers are generally required to file with the
Commission and/or SROs pursuant to Exchange Act Rule 17a-5. See 17
CFR 240.17a-5.
    \539\ This calculation was made as follows: (2,857 total retail
broker-dealers)-(802 small broker-dealers) = 2,055 large broker-
dealers.
---------------------------------------------------------------------------

    As an initial matter, we estimate that a large broker-dealer would
incur a one-time average internal burden of 50 hours for in-house legal
and in-house compliance counsel to update existing policies and
procedures to comply with Regulation Best Interest.\540\ We
additionally estimate a one-time burden of 5 hours for a general
counsel at a large broker-dealer and 5 hours for a Chief Compliance
Officer to review and approve the updated policies and procedures, for
a total of 60 burden hours.\541\ In addition, we estimate a cost of
$4,720 for outside counsel to review the updated policies and
procedures on behalf of a large broker-dealer.\542\ We therefore
estimate the aggregate burden for large broker-dealers to be 123,300
burden hours,\543\ and the aggregate cost for large broker-dealers to
be $9.70 million.\544\
---------------------------------------------------------------------------

    \540\ This estimate would be broken down as follows: 40 hours
for in-house legal counsel + 10 hours for in-house compliance
counsel to update existing policies and procedures = 50 burden
hours.
    \541\ This estimate is based on the following calculation: (50
hours of review for in-house legal and in-house compliance counsel)
+ (5 hours of review for general counsel) + (5 hours of review for
Chief Compliance Officer) = 60 burden hours.
    \542\ Based on industry sources, Commission staff preliminarily
estimates that the average hourly rate for legal services is $472/
hour. This cost estimate is therefore based on the following
calculation: (10 hours of review) x ($472/hour for outside counsel
services) = $4,720 in outside counsel costs.
    \543\ This estimate is based on the following calculation: (60
burden hours of review per large broker-dealer) x (2,055 large
broker-dealers) = 123,300 aggregate burden hours.
    \544\ This estimate is based on the following calculation:
($4,720 for outside counsel costs per large broker-dealer) x (2,055
large broker-dealers) = $9.70 million in outside counsel costs.
---------------------------------------------------------------------------

    In contrast, we believe small broker-dealers would primarily rely
on outside counsel to update existing policies and procedures, as small
broker-dealers generally have fewer in-house legal and compliance
personnel. Moreover, since small broker-dealers would typically have
fewer conflicts of interest, we estimate that only 40 hours of outside
legal counsel services would be required to update the policies and
procedures, for a total one-time cost of $18,880 \545\ per small
broker-dealer, and an aggregate cost of $15.1 million for all small
broker-dealers.\546\ We additionally believe in-house compliance
personnel would require 10 hours to review and approve the updated
policies and procedures, for an aggregate burden of 8,020 hours.\547\
---------------------------------------------------------------------------

    \545\ This cost estimate is based on the following calculation:
(40 hours of review) x ($472/hour for outside counsel services) =
$18,880 in outside counsel costs.
    \546\ This cost estimate is based on the following calculation:
($18,880 for outside attorney costs per small broker-dealer) x (802
small broker-dealers) = $15.1 million in outside counsel costs.
    \547\ This estimate is based on the following calculation: (10
burden hours) x (802 small broker-dealers) = 8,020 aggregate burden
hours.
---------------------------------------------------------------------------

    We therefore estimate the total initial aggregate burden to be
131,320 hours,\548\ and the total initial aggregate cost to be $24.8
million.\549\
---------------------------------------------------------------------------

    \548\ This estimate is based on the following calculation:
(123,300 aggregate burden hours for large broker-dealers) + (8,020
aggregate burden hours for small broker-dealers) = 131,320 total
aggregate burden hours.
    \549\ This estimate is based on the following calculation:
($9.70 million in aggregate costs for large broker-dealers) + ($15.1
million in aggregate costs for small broker-dealers) = $24.80
million total aggregate costs.

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

(2) Ongoing Costs and Burdens
    For purposes of this analysis, we have assumed that small and large
broker-dealers would review and update policies and procedures on a
periodic basis to accommodate the addition of, among other things, new
products or services, new business lines, and/or new personnel. We also
assume that broker-dealers would review and update their policies and
procedures for compliance with Regulation Best Interest on an annual
basis, and that they would perform the review and update using in-house
personnel.
    For large broker-dealers with more numerous, more complex products
and services, and higher rates of hiring and turnover, we estimate that
each broker-dealer would annually incur an internal burden of 12 hours
to review and update existing policies and procedures: Four hours for
legal personnel, four hours for compliance personnel, and four hours
for business-line personnel to identify new conflicts. We therefore
estimate an ongoing, aggregate burden for large broker-dealers of
approximately 24,660 hours.\550\ Because we assume that large broker-
dealers would rely on internal personnel to update policies and
procedures on an ongoing basis, we do not believe large broker-dealers
would incur ongoing costs.
---------------------------------------------------------------------------

    \550\ This estimate is based on the following calculation: (12
burden hours per large broker-dealer) x (2,055 large broker-dealers)
= 24,660 aggregate ongoing burden hours.
---------------------------------------------------------------------------

    We assume for purposes of this analysis that small broker-dealers,
with fewer and less complex products, and lower rates of hiring, would
mostly rely on outside legal counsel and outside compliance consultants
for review and update of their policies and procedures, with final
review and approval from an in-house compliance manager. We
preliminarily estimate that outside counsel would require approximately
five hours per year to update policies and procedures, for an annual
cost of $2,360 for each small broker-dealer.\551\ The projected
aggregate, annual ongoing cost for outside legal counsel to update
policies and procedures for small broker-dealers would be $1.89
million.\552\ In addition, we expect that small broker-dealers would
require five hours of outside compliance services per year to update
their policies and procedures, for an ongoing cost of $1,490 per
year,\553\ and an aggregate ongoing cost of $1.19 million.\554\ The
total aggregate, ongoing cost for small broker-dealers is therefore
projected at $3.08 million per year.\555\
---------------------------------------------------------------------------

    \551\ This estimate is based on the following calculation: (5
hours per small broker-dealer) x ($472/hour for outside counsel
services) = $2,360 in outside counsel costs.
    \552\ This estimate is based on the following calculation:
($2,360 in outside counsel costs per small broker-dealer) x (802
small broker-dealers) = $1.89 million in aggregate, ongoing outside
legal costs.
    \553\ Based on industry sources, Commission staff preliminarily
estimates that the average hourly rate for compliance services in
the securities industry is $298/hour. This cost estimate is based on
the following calculation: (5 hours of review) x ($298/hour for
outside compliance services) = $1,490 in outside compliance service
costs.
    \554\ This estimate is based on the following calculation:
($1,490 in outside compliance costs per small broker-dealer) x (802
small broker-dealers) = $1.19 million in aggregate, ongoing outside
compliance costs.
    \555\ This estimate is based on the following calculation:
($1.89 million for outside legal counsel costs) + ($1.19 million for
outside compliance costs) = $3.08 million total aggregate ongoing
costs.
---------------------------------------------------------------------------

    In addition to the costs described above, we additionally believe
small broker-dealers would incur an internal burden of approximately 5
hours for an in-house compliance manager to review and approve the
updated policies and procedures per year. The ongoing, aggregate burden
for small broker-dealers would be 4,010 hours for in-house compliance
manager review.\556\
---------------------------------------------------------------------------

    \556\ This estimate is based on the following calculation: (5
hours compliance manager review per small broker-dealer) x (802
small broker-dealers) = 4,010 aggregate ongoing burden hours.
---------------------------------------------------------------------------

    We therefore estimate the total ongoing aggregate ongoing burden to
be 28,670 hours,\557\ and the total ongoing aggregate cost to be $3.08
million per year.\558\
---------------------------------------------------------------------------

    \557\ This estimate is based on the following calculation:
(24,660 aggregate ongoing burden hours for large broker-dealers) +
(4,010 aggregate ongoing burden hours for small broker-dealers) =
28,670 total aggregate ongoing burden hours.
    \558\ This estimate is based on the following calculation:
($3.08 million per year in total aggregate ongoing costs for small
broker-dealers) + ($0 projected ongoing costs for large broker-
dealers) = $3.08 million per year in total aggregate ongoing costs.
---------------------------------------------------------------------------

    The Commission acknowledges that policies and procedures may vary
greatly by broker-dealer, given the differences in size and the
complexity of broker-dealer business models. Accordingly, we would
expect that the need to update policies and procedures might also vary
greatly.
b. Identification of Material Conflicts of Interest
(1) Initial Costs and Burdens
    With respect to identifying and determining whether a material
conflict of interest exists in connection with a recommendation, a
broker-dealer would first need to establish mechanisms to proactively
and systematically identify conflicts of interest in its business on an
ongoing or periodic basis.\559\ For purposes of this analysis, we
understand that most broker-dealers already have an existing
technological infrastructure in place, and we assume that such
infrastructure would need to be modified to effect compliance with
Regulation Best Interest.
---------------------------------------------------------------------------

    \559\ See supra Section II.D.3.c.
---------------------------------------------------------------------------

    Acknowledging that costs and burdens may vary greatly according to
the size of the broker-dealer, we expect that the modification of a
broker-dealer's existing technology would initially require the
retention of an outside programmer, and that the modification of
existing technology would require, on average, an estimated 20 hours of
the programmer's labor, for an estimated cost per broker-dealer of
$5,400.\560\ We additionally project that coordination between the
programmer and the broker-dealer's compliance manager would involve
five burden hours. The aggregate costs and burdens for the modification
of existing technology to identify conflicts of interest would
therefore be $15.43 million,\561\ and 14,285 burden hours.\562\
---------------------------------------------------------------------------

    \560\ Based on industry sources, Commission staff preliminarily
estimates that the average hourly rate for technology services in
the securities industry is $270. This cost estimate is based on the
following calculation: (20 hours of review) x ($270/hour for
technology services) = $5,400 in outside programmer costs.
    \561\ This cost estimate is based on the following calculation:
($5,400 in outside programmer costs per broker-dealer) x (2,857
retail broker-dealers) = $15.43 million in aggregate outside
programmer costs.
    \562\ This burden estimate is based on the following
calculation: (5 burden hours) x (2,857 broker-dealers) = 14,285
aggregate burden hours.
---------------------------------------------------------------------------

    We additionally believe that the determination whether the
conflicts of interest, once identified, are material, would require
approximately five hours per broker-dealer,\563\ for an aggregate of
14,285 burden hours for all broker-dealers.\564\ The total aggregate
burden for the identification of material conflicts is 28,570
hours.\565\
---------------------------------------------------------------------------

    \563\ This burden estimate consists of 2.5 hours for review by a
senior business analyst, and 2.5 hours for review by in-house
compliance manager.
    \564\ This burden estimate is based on the following
calculation: (5 burden hours) x (2,857 broker-dealers) = 14,285
aggregate burden hours.
    \565\ This burden estimate is based on the following
calculation: (14,285 burden hours for modification of technology) +
(14,285 burden hours for evaluation of conflict materiality) =
28,570 total aggregate burden hours.
---------------------------------------------------------------------------

(2) Ongoing Costs and Burdens
    To maintain compliance with Regulation Best Interest, we assume for
purposes of this PRA analysis that a broker-dealer would seek to
identify additional conflicts as its business evolves. The Commission
recognizes that the types of services and product offerings vary
greatly by broker-dealer.

However, for purposes of this analysis, we assume that broker-dealers
would, at a minimum, engage in a material conflicts identification
process on an annual basis.\566\ We estimate that a broker-dealer's
business line and compliance personnel would jointly spend, on average,
10 hours \567\ to perform an annual conflicts review using the modified
technology infrastructure. Therefore the aggregate, ongoing burden for
an annual conflicts review, based on an estimated 2,857 retail broker-
dealers, would be approximately 28,570 burden hours.\568\ Because we
assume that broker-dealers would use in-house personnel to identify and
evaluate new, potential conflicts, we do not believe they would incur
additional ongoing costs.
---------------------------------------------------------------------------

    \566\ Analogously, FINRA rules set an annual supervisory review
as a minimum threshold for broker-dealers. See, e.g., FINRA Rules
3110 (requiring an annual review of the businesses in which the
broker-dealer engages); 3120 (requiring an annual report detailing a
broker-dealer's system of supervisory controls, including compliance
efforts in the areas of antifraud and sales practices); and 3130
(requiring each broker-dealer's CEO or equivalent officer to certify
annually to the reasonable design of the policies and procedures for
compliance with relevant regulatory requirements).
    \567\ This burden estimate consists of 5 hours for review by a
senior business analyst, and 5 hours for review by an in-house
compliance counsel or compliance manager.
    \568\ This estimate is based on the following calculation: (10
hours of labor per retail broker-dealer) x (2,857 retail broker-
dealers) = 28,570 aggregate burden hours.
---------------------------------------------------------------------------

c. Training
    Pursuant to the obligation to ``maintain and enforce'' written
policies and procedures, we additionally expect broker-dealers to
develop training programs that promote compliance with Regulation Best
Interest among registered representatives. The initial and ongoing
costs and burdens associated with such a training program are estimated
below.
(1) Initial Costs and Burdens
    We believe that broker-dealers would likely use a computerized
training module to train registered representatives on the policies and
procedures pertaining to Regulation Best Interest. We estimate that a
broker-dealer would retain an outside systems analyst, an outside
programmer, and an outside programmer analyst to create the training
module, at 20 hours, 40 hours, and 20 hours, respectively. The total
cost for a broker-dealer to develop the training module would be
approximately $21,600,\569\ for an aggregate initial cost of $61.7
million.\570\
---------------------------------------------------------------------------

    \569\ This estimate is based on the following calculation: ((20
hours of labor for a systems analyst) x ($270/hour)) + ((40 hours of
labor for a programmer) x ($270/hour)) + ((20 hours of labor for a
programmer analyst) x ($270/hour)) = $21,600 in external technology
service costs per broker-dealer. As noted above, the $270 estimated
average hourly rate for technology services is based on industry
sources.
    \570\ This estimate is based on the following calculation:
(2,857 broker-dealers) x ($21,600 cost per broker-dealer) = $61.7
million in aggregate costs for technology services.
---------------------------------------------------------------------------

    Additionally, we expect that the training module would require the
approval of the Chief Compliance Officer, as well as in-house legal
counsel, each of whom we expect would require approximately 2 hours to
review and approve the training module. The aggregate burden for
broker-dealers is therefore estimated at 11,428 burden hours.\571\
---------------------------------------------------------------------------

    \571\ This estimate is based on the following calculation:
(2,857 broker-dealers) x (4 burden hours per broker-dealer) = 11,428
burden hours.
---------------------------------------------------------------------------

    In addition, broker-dealers would incur an initial cost for
registered representatives to undergo training through the training
module. We estimate the training time at one hour per registered
representative, for an aggregate burden of 435,071 burden hours, or an
initial burden of 152.3 hours per broker-dealer.\572\ The total
aggregate burden to approve the training module and implement the
training program would be 446,699 burden hours.\573\
---------------------------------------------------------------------------

    \572\ This estimate is based on the following calculation: (1
burden hour) x (435,071 registered representatives at standalone or
dually-registered broker-dealers) = 435,071 aggregate burden hours.
Conversely, (435,071 aggregate burden hours)/(2,857 retail broker-
dealers) = 152.3 initial burden hours per broker-dealer.
    \573\ This estimate is based on the following calculation:
(435,071 burden hours for training of registered representatives) +
(11,428 burden hours to approve training program) = 446,699 total
aggregate burden hours.
---------------------------------------------------------------------------

(2) Ongoing Costs and Burdens
    We believe that, as a matter of best practice, broker-dealers would
likely require registered representatives to repeat the training module
for Regulation Best Interest on an annual basis. The ongoing aggregate
cost for the one-hour training would be 435,071 burden hours per year,
or 152.3 burden hours per broker-dealer per year.\574\
---------------------------------------------------------------------------

    \574\ This estimate is based on the following calculation: (1
burden hour) x (435,071 registered representatives at standalone or
dually-registered broker-dealers) = 435,071 burden hours.
Conversely, (435,071 aggregate burden hours)/(2,857 retail broker-
dealers) = 152.3 initial burden hours per broker-dealer.
---------------------------------------------------------------------------

2. Disclosure Obligation
    The Disclosure Obligation under proposed Regulation Best Interest
would require a broker-dealer, prior to or at the time of recommending
a securities transaction or strategy involving securities to a retail
customer, to: (1) Reasonably disclose to the retail customer, in
writing, the material facts relating to the scope and terms of the
relationship with the retail customer; and (2) reasonably disclose to
the retail customer, in writing, all material conflicts of interest
that are associated with the recommendation. The Commission believes
that requiring broker-dealers to reasonably disclose to the retail
customer, in writing, the material facts relating to the scope and
terms of the relationship with a retail customer would facilitate a
retail customer's understanding of the nature of his or her account,
the broker-dealer's fees and charges, as well as the nature of services
that the broker-dealer provides, as well as any limitations to those
services. It would also reduce retail customers' confusion about the
differences among certain financial service providers, such as broker-
dealers, investment advisers, and dual-registrants. In addition, the
obligation to disclose all material conflicts of interest associated
with a recommendation would raise retail customers' awareness of the
potential effects of conflicts of interest, and increase the likelihood
that broker-dealers would make recommendations that are in the retail
customer's best interest.
    The collections of information associated with these Disclosure
Obligations, as well as the associated record-making and recordkeeping
obligations are addressed below.
a. Obligation To Reasonably Disclose to the Retail Customer, in
Writing, the Material Facts Relating to the Scope and Terms of the
Relationship With the Retail Customer
    The Commission assumes for purposes of this analysis that broker-
dealers would meet their obligation to reasonably disclose to the
retail customer, in writing, the material facts relating to the scope
and terms of the relationship with the retail customer through a
combination of delivery of the Relationship Summary, creating account
disclosures to include standardized language related to capacity and
scope, and types of services and the development of comprehensive fee
schedules.
(1) Disclosure of Capacity
    As discussed above, the Commission preliminarily believes that a
standalone broker-dealer would be able to satisfy its obligation to
disclose that it is acting in a broker-dealer capacity by providing

the retail customer with the Relationship Summary in the manner
prescribed by the rules and guidance in the Relationship Summary
Proposal.\575\
---------------------------------------------------------------------------

    \575\ See Relationship Summary Proposal.
---------------------------------------------------------------------------

    We assume, for purposes of this PRA analysis, that a dually-
registered broker-dealer would satisfy its obligation to disclose it is
acting in a broker-dealer capacity by creating an account disclosure
with standardized language, and by providing it to the retail customer
at the beginning of the relationship. The account disclosure would set
forth when the broker-dealer would be acting in a broker-dealer
capacity, and how the broker-dealer would notify the retail customer of
any changes in its capacity. We understand that many broker-dealers
already include such information in account disclosures.
(2) Disclosure of Fees, Charges, and Types/Scope of Services
    While many broker-dealers do provide fee information to retail
customers in a fee schedule, the Commission believes that to comply
with proposed Regulation Best Interest broker-dealers would likely
either amend this schedule or develop a new fee schedule to disclose
the fees and charges applicable to retail customers' transactions,
holdings, and accounts through the use or development of a
comprehensive, standardized fee schedule. This fee schedule would be
delivered to retail customers at the beginning of a relationship. If,
at the time the recommendation is made, the disclosure made to the
retail customer is not current or does not contain all material facts
regarding the fees of the particular recommendation, the broker-dealer
would need to deliver an amended fee schedule.
    With respect to disclosure of the types and scope of services
provided by the broker-dealer, we assume for purposes of this PRA
analysis that broker-dealers would satisfy the Disclosure Obligation by
including this information in the account disclosure provided to the
retail customer at the beginning of the relationship, as described
above. The broker-dealer would need to deliver an amended account
disclosure to the retail customer in the case of any material changes
made to the type and scope of services.
b. Obligation To Reasonably Disclose in Writing All Material Conflicts
of Interest That Are Associated With the Recommendation
    Proposed Regulation Best Interest would require a broker-dealer to
reasonably disclose in writing all material conflicts of interest that
are associated with a recommendation.
    As discussed above, we preliminarily assume that broker-dealers
would satisfy the obligation to disclose material conflicts of interest
through the use of a standardized, written disclosure document provided
to all retail customers and supplemental disclosure provided to certain
retail customers for specific products.
    We assume for purposes of this analysis that delivery of written
disclosure would occur at the beginning of a relationship, such as
together with the account opening agreement. For existing retail
customers, the disclosure would need to occur ``prior to or at the
time'' of a recommendation. Subsequent disclosures may be delivered in
the event of a material change or if the broker-dealer determines
additional disclosure is needed for certain types of products.
    The corresponding estimated total annual reporting costs and
burdens are addressed below.\576\
---------------------------------------------------------------------------

    \576\ The costs and burdens arising from the obligation to
identify all material conflicts of interest that are associated with
the recommendation are addressed above, in the context of the
Conflict of Interest Obligation, in Section V.B.1.
---------------------------------------------------------------------------

c. Estimated Costs and Burdens
(1) Disclosure of Capacity, Type and Scope of Services
    Standalone broker-dealers would satisfy the obligation to disclose
capacity through the delivery to retail customers of the Relationship
Summary, in accordance with the rules and guidance set forth in the
Relationship Summary Proposal. Additionally, although we understand
that many dual-registrants and standalone broker-dealers, as a matter
of best practice, already disclose capacity and types and scope of
services to retail customers, for purposes of this analysis, we are
assuming that dual-registrants would create new account disclosure
related to capacity and all broker-dealers would create account
disclosure related to types and scope of services specifically for
purposes of compliance with Regulation Best Interest. The Commission
assumes that broker-dealers would provide the account disclosure to
each retail customer account, regardless of whether the retail customer
has multiple accounts with the broker-dealer.
    While the Commission recognizes that the Disclosure Obligation
applies to the broker-dealer entity and its registered representatives,
we do not expect registered representatives to incur any initial or
ongoing burdens with respect to the capacity, scope and terms of the
relationship, as we assume for purposes of this analysis that this
information would be addressed by the broker-dealer entity's account
disclosure. With regard to disclosure of capacity, the Commission
believes that dually-registered representatives of broker-dealers would
incur initial and ongoing burdens. Following is a discussion of the
estimated initial and ongoing burdens and costs.
i. Initial Burdens and Costs
    We estimate that a dually-registered firm would incur an initial
internal burden of 10 hours for in-house counsel and in-house
compliance personnel \577\ to draft language regarding capacity for
inclusion in the standardized account disclosure that is delivered to
the retail customer.\578\
---------------------------------------------------------------------------

    \577\ The 10 hour estimate includes 5 hours for in-house counsel
to draft and review the standardized language, and 5 hours for
consultation and review of compliance personnel.
    \578\ As discussed above, the following estimates include the
burdens and costs that broker-dealers would incur in drafting
standardized account disclosure language related to capacity, scope
and terms of the relationship on behalf of their dually-registered
representatives. For purposes of this analysis, the Commission
assumes that broker-dealers would undertake these tasks on behalf of
their registered representatives.
---------------------------------------------------------------------------

    In addition, we estimate that dual-registrants would incur an
estimated external cost of $4,720 for the assistance of outside counsel
in the preparation and review of standardized language regarding
capacity.\579\ For the estimated 360 dually-registered firms with
retail business,\580\ we project an aggregate initial burden of 3,600
hours,\581\ and $1.7 million in aggregate initial costs.\582\
---------------------------------------------------------------------------

    \579\ This estimate is based on the following calculation: (10
hours for outside counsel review/drafting) x ($472/hour for outside
counsel services) = $4,720 in initial outside counsel costs.
    \580\ See supra Section IV.B.1.a, at Table 1, Panel B.
    \581\ This estimate is based on the following calculation: (360
dually-registered retail firms) x (10 hours) = 3,600 initial
aggregate burden hours.
    \582\ This estimate is based on the following calculation: (360
dually-registered retail firms) x ($4,720 in external cost per firm)
= $1.7 million in aggregate initial costs.
---------------------------------------------------------------------------

    Similarly, to comply with proposed Regulation Best Interest,
standalone broker-dealers would likely draft standardized language for
inclusion in the account disclosure to provide the retail customer with
more specific information regarding the types and scope of services
that they provide. We expect that the associated costs and burdens
would differ between small and large broker-dealers, as large broker-
dealers generally offer more products

and services and therefore would need to potentially evaluate a larger
number of products and services.
    Given these assumptions, we estimate that a small broker-dealer
would incur an internal initial burden of 10 hours for in-house counsel
and in-house compliance personnel to draft this standardized
language.\583\ In addition, a small broker-dealer would incur an
estimated external cost of $4,720 for the assistance of outside counsel
in the preparation and review of this standardized language.\584\ For
the estimated 802 small broker-dealers,\585\ we project an aggregate
initial burden of 8,020 hours,\586\ and aggregate initial costs of
$3.79 million.\587\
---------------------------------------------------------------------------

    \583\ The 10 hour estimate includes 5 hours for in-house counsel
to draft and review the standardized language, and 5 hours for
consultation and review of compliance personnel.
    \584\ This estimate is based on the following calculation: (10
hours for outside counsel review/drafting) x ($472/hour for outside
counsel services) = $4,720 in initial outside counsel costs.
    \585\ See supra note 538 and accompanying text.
    \586\ This estimate is based on the following calculation: (802
small broker-dealers) x (10 hours per small broker-dealer) = 8,020
aggregate burden hours.
    \587\ This estimate is based on the following calculation: (802
small broker-dealers) x ($4,720 in external cost per small retail
firm) = $3.79 million in aggregate initial costs.
---------------------------------------------------------------------------

    Given the broader array of products and services offered, we
estimate that a large broker-dealer would incur an internal burden of
20 hours to draft this standardized language.\588\ A large broker-
dealer would also incur an estimated cost of $7,080 for the assistance
of outside counsel in the preparation and review of this standardized
language.\589\ For the estimated 2,055 large retail broker-dealers, we
estimate an aggregate initial burden of 41,100 hours,\590\ and $14.55
million in aggregate initial costs.\591\
---------------------------------------------------------------------------

    \588\ The 20 hour estimate includes 10 hours for in-house
counsel to draft and review the standardized language, and 10 hours
for consultation and review of compliance personnel.
    \589\ This estimate is based on the following calculation: (15
hours for outside counsel review/drafting) x ($472/hour for outside
counsel services) = $7,080 in initial outside counsel costs.
    \590\ This estimate is based on the following calculation:
(2,055 large broker-dealers) x (20 burden hours) = 41,100 aggregate
initial burden hours.
    \591\ This estimate is based on the following calculation:
(2,055 large broker-dealers) x ($7,080 initial outside counsel
costs) = $14.55 million in aggregate initial costs.
---------------------------------------------------------------------------

    We estimate that all broker-dealers would each incur approximately
0.02 burden hour \592\ for delivery of the account disclosure
document.\593\ Based on FOCUS data, we estimate that the 2,857 broker-
dealers that report retail activity have approximately 128 million
customer accounts, and that approximately 74.4%, or 95.2 million, of
those accounts belong to retail customers.\594\ We therefore estimate
that broker-dealers would have an aggregate initial burden of 1,904,000
hours, or approximately 666 hours \595\ per broker-dealer for the first
year after the rule is in effect.\596\
---------------------------------------------------------------------------

    \592\ This is the same estimate the Commission makes in the
Relationship Summary Proposing Release. It is also the same estimate
the Commission made in the Amendments to Form ADV Adopting Release,
and for which we received no comment. See Amendments to Form ADV, 17
CFR parts 275 and 279 at 49259. We expect that delivery requirements
will be performed by a general clerk. The general clerk's time is
included in the initial burden estimate.
    \593\ As noted above, for new retail customers, we expect
delivery to occur at the inception of the relationship; for existing
customers, we expect delivery to occur prior to or at the time of a
recommendation.
    \594\ The 2,857 broker-dealers (including dual registrants) with
retail customers report 128 million customer accounts. See Section
IV.B.1.a, Table 1, Panel B. Assuming the amount of retail customer
accounts is proportionate to the percentage of broker-dealers that
have retail customers, or 74.4% of broker-dealers, then the number
of retail customer accounts would be 74.4% of 128 million accounts =
95.2 million retail customer accounts. This number likely overstates
the number of deliveries to be made due to the double-counting of
deliveries to be made by dual registrants to a certain extent, and
the fact that one customer may own more than one account.
    \595\ These estimates are based on the following calculations:
(0.02 hours per customer account x (95.2 million retail customer
accounts) = 1,904,000 aggregate burden hours. Conversely, (1,904,000
hours)/(2,857 broker-dealers) = approximately 666 burden hours per
broker-dealer.
    \596\ We estimate that broker-dealers will not incur any
incremental postage costs because we assume that they will make such
deliveries with another mailing the broker-dealer was already
delivering to retail customers.
---------------------------------------------------------------------------

    We estimate a total initial aggregate burden for dually-registered,
small and large broker-dealers to develop and deliver to retail
customers account disclosures relating to capacity and type and scope
of services of 1,956,620 burden hours.\597\ We estimate a total initial
aggregate cost of $20.04 million.\598\
---------------------------------------------------------------------------

    \597\ This estimate is based on the following calculation:
(3,600 aggregate initial burden hours for dual registrants) + (8,020
aggregate initial burden hours for small broker-dealers) + (41,000
burden hours for large broker-dealers) + (1,904,000 aggregate
initial burden hours for all broker-dealers to deliver the account
disclosures) = 1,956,620 total aggregate initial burden hours.
    \598\ This estimate is based on the following calculation: ($1.7
million in initial aggregate costs for dual registrants) + ($3.79 in
initial aggregate costs for small broker-dealers) + ($14.55 million
in initial aggregate costs for large broker-dealers) = $20.04
million in total initial aggregate costs.
---------------------------------------------------------------------------

ii. Ongoing Burdens
    For purposes of this analysis, we assume that broker-dealers would
review and amend the standardized language in the account disclosure,
on average, once a year. Further, we assume that broker-dealers would
not incur outside costs in connection with updating account
disclosures, as in-house personnel would be more knowledgeable about
changes in capacity, and the types and scope of services offered by the
broker-dealer.
    We estimate that each dually-registered broker-dealer would incur
approximately five burden hours annually for compliance and business
line personnel to review changes in the dual-registrant's capacity and
types and scope of services offered, and another two burden hours
annually for in-house counsel to amend the account disclosure to
disclose material changes to the dual-registrant's capacity and types
and scope of services offered, for a total of seven burden hours. The
estimated ongoing aggregate burden to amend dual-registrants' account
disclosures to reflect changes in capacity and types and scope of
services would therefore be 2,520 hours.\599\
---------------------------------------------------------------------------

    \599\ This estimate is based on the following calculation: (7
burden hours per dually-registered firm per year) x (360 dually-
registered broker-dealers) = 2,520 ongoing aggregate burden hours.
---------------------------------------------------------------------------

    With respect to small standalone broker-dealers, we estimate an
internal burden of two hours for in-house compliance and business line
personnel to review and update changes in capacity and types or scope
of services offered, and another two burden hours annually for in-house
counsel to amend the account disclosure to disclose material changes to
capacity and types or scope of services--for a total of four burden
hours. The estimated ongoing aggregate burden for small broker-dealers
to amend account disclosures to reflect changes in capacity and types
and scope of services would therefore be 3,208 hours for small broker-
dealers.\600\
---------------------------------------------------------------------------

    \600\ This estimate is based on the following calculation: (4
burden hours per broker-dealer per year) x (802 small broker-
dealers) = 3,208 ongoing aggregate burden hours.
---------------------------------------------------------------------------

    We estimate that large standalone broker-dealers would incur 10
burden hours annually for in-house compliance and business line
personnel to review and update changes in capacity and the types or
scope of services offered, and another 10 burden hours annually for in-
house counsel to amend the account disclosure to disclose material
changes to capacity and the types and scope of services, for a total of
20 burden hours. We therefore believe the ongoing, aggregate burden
would be 41,100 hours for large broker-dealers.\601\
---------------------------------------------------------------------------

    \601\ This estimate is based on the following calculation: (20
burden hours per broker-dealer per year) x (2,055 large broker-
dealers) = 41,100 ongoing aggregate burden hours.
---------------------------------------------------------------------------

    With respect to delivery of the amended account agreements in the

event of material changes to the capacity disclosure or disclosure
related to types and scope of services, we estimate that this would
take place among 20% of a broker-dealer's retail customer accounts
annually. We therefore estimate broker-dealers to incur a total annual
aggregate burden of 380,800 hours, or 133 hours per broker-dealer.\602\
---------------------------------------------------------------------------

    \602\ (20%) x (95.2 million retail customer accounts) x (.02
hours for delivery to each customer account) = 380,800 aggregate
burden hours. Conversely, 380,800 aggregate burden hours/2,857
broker-dealers = 133 burden hours per broker-dealer.
---------------------------------------------------------------------------

    The total ongoing aggregate burden for dually-registered, small and
large broker-dealers to review, amend, and delivery updated account
disclosures to reflect changes in capacity, types and scope of services
would be 427,700 burden hours per year.\603\
---------------------------------------------------------------------------

    \603\ This estimate is based on the following calculation:
(2,520 ongoing aggregate burden hours for dually-registered broker-
dealers) + (3,280 ongoing aggregate burden hours for small broker-
dealers) + (41,100 ongoing aggregate burden hours for large broker-
dealers) + (380,800 ongoing aggregate burden hours for delivery of
amended account disclosures) = 427,700 total ongoing aggregate
burden hours.
---------------------------------------------------------------------------

    The Commission acknowledges that the types of services and offering
of products vary greatly by broker-dealer, and therefore that the costs
or burdens associated with updating the account disclosure might
similarly vary.
(2) Disclosure of Fees
    The Commission assumes for purposes of this analysis that a broker-
dealer would disclose its fees and charges through a standardized fee
schedule, delivered to the retail customer at the inception of the
relationship, or, for existing retail customers, prior to or at the
time of a recommendation and, as discussed below, would amend such fee
schedules in the event of material changes. Although we understand that
many broker-dealers already provide fee schedules to retail customers,
we are assuming for purposes of this analysis that a fee schedule would
be created specifically for purposes of compliance with Regulation Best
Interest. While the Commission recognizes that the fee disclosure
included in Disclosure Obligation applies to the broker-dealer entity
and its natural associated persons, we do not expect any burdens or
costs on registered representatives related to the fees and charges as
this information would be addressed in the broker-dealer entity's fee
schedule.
i. Initial Costs/Burdens
    We assume that, for purposes of this analysis, the associated costs
and burdens would differ between small and large broker-dealers, as
large broker-dealers generally offer more products and services and
therefore would need to potentially evaluate a wider range of fees in
their fee schedules. As stated above, while we anticipate that many
broker-dealers may already create fee schedules, we believe that small
broker-dealers would initially spend five hours and large broker-
dealers would spend ten hours to internally create a new fee schedule
in consideration of the requirements of Regulation Best Interest. We
additionally estimate a one-time external cost of $2,360 for smaller
broker-dealers \604\ and $4,720 for larger broker-dealers for outside
counsel to review the fee schedule.\605\ We therefore estimate the
initial aggregate burden for small broker-dealers to be 4,010 burden
hours,\606\ and the initial aggregate cost to be $1.89 million.\607\ We
estimate the aggregate burden for large broker-dealers to be 20,550
burden hours,\608\ and the aggregate cost to be $9.7 million.\609\
---------------------------------------------------------------------------

    \604\ This cost estimate is based on the following calculation:
(5 hours of review) x ($472/hour for outside counsel services) =
$2,360 outside counsel costs.
    \605\ This cost estimate is based on the following calculation:
(10 hours of review) x ($472/hour for outside counsel services) =
$4,720 outside counsel costs.
    \606\ This estimate is based on the following calculation: (5
burden hours of review per small broker-dealer) x (802 small broker-
dealers) = 4,010 aggregate initial burden hours.
    \607\ This estimate is based on the following calculation:
($2,360 for outside counsel costs per small broker-dealer) x (802
small broker-dealers) = $1.89 million in aggregate initial outside
costs.
    \608\ This estimate is based on the following calculation: (10
burden hours of review per large broker-dealer) x (2,055 large
broker-dealers) = 20,550 aggregate initial burden hours.
    \609\ This estimate is based on the following calculation:
($4,720 for outside counsel costs per large broker-dealer) x (2,055
large broker-dealers) = $9.70 million in aggregate initial costs.
---------------------------------------------------------------------------

    Similar to delivery of the account disclosure regarding capacity
and types and scope of services, we estimate the burden for broker-
dealers to make the initial delivery of the fee schedule to new retail
customers, at the inception of the relationship, and existing retail
customers, prior to or at the time of a recommendation, will require
approximately 0.02 hours to deliver to each retail customer.\610\ As
stated above, we estimate that the 2,857 broker-dealers that report
retail activity have approximately 128 million customer accounts, and
that approximately 74.4%, or 95.2 million, of those accounts belong to
retail customers.\611\ We therefore estimate that a broker-dealer will
have an aggregate initial burden of 380,800 hours, or approximately 133
hours per broker-dealer for the first year after the rule is in
effect.\612\
---------------------------------------------------------------------------

    \610\ See supra note 592.
    \611\ See supra note 593.
    \612\ This estimate is based on the following calculation: (20%)
x (95.2 million retail customer accounts) x (.02 hours for delivery
to each customer account) = 380,800 aggregate burden hours.
Conversely, (380,800 aggregate burden hours)/(2,857 broker-dealers)
= 133 burden hours per broker-dealer.
---------------------------------------------------------------------------

    The total aggregate initial burden for broker-dealers is therefore
estimated at 405,360 \613\ hours, and the total aggregate initial cost
is estimated at $11.59 million.\614\
---------------------------------------------------------------------------

    \613\ This estimate is based on the following calculations:
(4,010 aggregate burden hours for small broker-dealers) + (20,550
burden hours for large broker-dealers) + (380,800 burden hours for
delivery) = 405,360 total aggregate initial burden hours.
    \614\ This estimate is based on the following calculation:
($1.89 million for small broker-dealer costs) + ($9.7 million large
broker-dealer costs) = $11.59 million in total aggregate costs.
---------------------------------------------------------------------------

ii. Ongoing Costs/Burdens
    For purposes of this PRA analysis, we assume that broker-dealers
would review and amend the fee schedule on average, once a year. With
respect to small broker-dealers, we estimate that it would require
approximately two hours per year to review and update the fee schedule,
and for large broker-dealers, we estimate that the recurring, annual
burden to review and update the fee schedule would be four hours for
each large broker-dealer. Based on these estimates, we estimate the
recurring, aggregate, annualized burden would be approximately 1,604
hours for small broker-dealers \615\ and 8,220 hours for large broker-
dealers.\616\ We do not anticipate that small or large broker-dealers
would incur outside legal, compliance, or consulting fees in connection
with updating their standardized fee schedule since in-house personnel
would be more knowledgeable about these facts, and we therefore do not
expect external costs associated with updating the fee schedule.
---------------------------------------------------------------------------

    \615\ This estimate is based on the following calculation: (2
burden hours per broker-dealer) x (802 small broker-dealers) = 1,604
aggregate burden hours.
    \616\ This estimate is based on the following calculation: (4
burden hours per broker-dealer) x (2,055 large broker-dealers) =
8,220 aggregate burden hours.
---------------------------------------------------------------------------

    With respect to delivery of the amended fee schedule in the event
of a material change, we estimate that this would take place among 40%
of a broker-dealer's retail customer accounts annually. We therefore
estimate broker-dealers would incur a total annual aggregate burden of
761,600 hours, or 267 hours per broker-dealer.\617\
---------------------------------------------------------------------------

    \617\ This estimate is based on the following calculation: (40%
of 95.2 million retail customer accounts) x (.02 hours) = 761,600
aggregate burden hours. Conversely, (761,600 aggregate burden
hours)/(2,857 broker-dealers) = 267 burden hours per broker-dealer.

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

    The Commission acknowledges that the type of fee schedule may vary
greatly by broker-dealer, and therefore that the costs or burdens
associated with updating the standardized fee schedule might similarly
vary.
(3) Disclosure of Material Conflicts of Interest
    Regulation Best Interest would require broker-dealers to reasonably
disclose all material conflicts that are associated with a
recommendation. Because the Disclosure Obligation applies to both
broker-dealers entity and registered representatives, the Commission
expects that the broker-dealer entity and its registered
representatives would incur initial and ongoing burdens. However, as
with the disclosure of capacity and types and scope of services, we
assume for purposes of this analysis that broker-dealers would incur
the burdens and costs of disclosing material conflicts of interest on
behalf of their registered representatives.
i. Initial Costs and Burdens
    The Disclosure Obligation of proposed Regulation Best Interest
would provide broker-dealers with the flexibility to choose the form
and manner of conflict disclosure. However, we believe that many or
most broker-dealers would develop a standardized conflict disclosure
document and distribute it to retail customers.\618\ We also assume for
purposes of this PRA analysis that broker-dealers would update and
deliver the standardized conflict disclosure document yearly on an
ongoing basis, following the broker-dealer's annual conflicts review
process.\619\
---------------------------------------------------------------------------

    \618\ As noted above, we assume that delivery for new customers
would occur at the inception of the relationship, and that delivery
for existing customers would occur prior to or at the time a
recommendation is made.
    \619\ However, as discussed above, we recognize that broker-
dealers might choose to disclose material conflicts of interest on
an as-needed basis, and might take a layered approach to disclosure,
as opposed to a standardized conflict disclosure document. We
request comment on whether broker-dealers may choose to take a
layered approach to disclosure and the associated costs of burdens.
---------------------------------------------------------------------------

    For purposes of this PRA analysis, we assume that a standardized
conflict disclosure document would be developed by in-house counsel and
reviewed by outside counsel. For small broker-dealers, we estimate it
would take in-house counsel, on average, 5 burden hours to create the
standardized conflict disclosure document and outside counsel 5 hours
to review and revise the document. The initial aggregate burden for the
development of a standardized disclosure document, based on an
estimated 802 small broker-dealers, would be approximately 4,010 burden
hours.\620\ We additionally estimate an initial cost of $2,360 per
small broker-dealer,\621\ and an aggregate initial cost of $1.89
million for all small broker-dealers.\622\
---------------------------------------------------------------------------

    \620\ This estimate is based on the following calculation: (5
hours) x (802 small broker-dealers) = 4,010 aggregate burden hours.
    \621\ This estimate is based on the following calculation:
($472/hour) x (5 hours) = $2,360 in initial costs.
    \622\ This estimate is based on the following calculation:
($472/hour x 5 hours) x (802 broker-dealers) = $1.89 million in
aggregate initial costs.
---------------------------------------------------------------------------

    We expect the development and review of the standardized conflict
disclosure document to take longer for large broker-dealers because, as
discussed above, we believe large broker-dealers generally offer more
products and services and employ more individuals, and therefore would
need to potentially disclose a larger number of conflicts. We estimate
that for large broker-dealers, it would take 7.5 burden hours for in-
house counsel to create the standardized conflict disclosure document,
and outside counsel would take another 7.5 hours to review and revise
the disclosure document. As a result, we estimate the initial aggregate
burden, based on an estimated 2,055 large broker-dealers, to be
approximately 15,413 burden hours.\623\ We additionally estimate
initial costs of $3,540 per broker-dealer,\624\ and an aggregate cost
for large broker-dealers of approximately $7.27 million.\625\
---------------------------------------------------------------------------

    \623\ This estimate is based on the following calculation: (7.5
hours x 2,055 large broker-dealers) = 15,413 burden hours.
    \624\ This estimate is based on the following calculation:
($472/hour) x (7.5 hours) = $3,540 in initial costs.
    \625\ This estimate is based on the following calculation:
($472/hour) x (7.5 hours x 2,055 large broker-dealers) = $7.27
million in aggregate costs.
---------------------------------------------------------------------------

    We assume that broker-dealers would deliver the standardized
conflict disclosure document to new retail customers at the inception
of the relationship, and to existing retail customers prior to or at
the time of a recommendation. We estimate that broker-dealers would
require approximately 0.02 hours to deliver the standardized conflict
disclosure document to each retail customer.\626\ We therefore estimate
that broker-dealers would incur an aggregate initial burden of
1,904,000 hours, or approximately 666 hours per broker-dealer for
delivery of the standardized conflict disclosure document the first
year after the rule is in effect.\627\
---------------------------------------------------------------------------

    \626\ See supra note 592. For purposes of this PRA analysis, we
have assumed any initial disclosures made by the broker-dealer
related to material conflicts of interest would be delivered
together.
    \627\ These estimates are based on the following calculations:
(0.02 hours per customer account x 95.2 million retail customer
accounts) = 1,904,000 aggregate burden hours. Conversely, (1,904,000
hours)/(2,857 broker-dealers) = 666 burden hours per broker-dealer.
---------------------------------------------------------------------------

ii. Ongoing Costs and Burdens
    We believe that broker-dealers would incur ongoing annual burdens
and costs to update the disclosure document to include newly identified
conflicts. While Regulation Best Interest does not require broker-
dealers to provide disclosures at specific intervals or times, but
rather allows broker-dealers to provide disclosures on an as-needed
basis, we assume for purposes of this analysis that broker-dealers
would update their conflict disclosure document annually, after
conducting an annual conflicts review. We estimate that the conflict
disclosure form would be updated internally by both small and large
broker-dealers.
    We estimate that in-house counsel at a small broker-dealer would
require approximately 1 hour per year to update the standardized
conflict disclosure document, for an ongoing aggregate burden of
approximately 802 hours.\628\ For large broker-dealers, we estimate
that the ongoing, annual burden would be 2 hours for each broker-
dealer: 1 hour for compliance personnel and 1 hour for legal personnel.
We therefore estimate the ongoing, aggregate burden for large broker-
dealers to be approximately 4,110 burden hours.\629\ We do not
anticipate that small or large broker-dealers would incur outside
legal, compliance, or consulting fees in connection with updating their
standardized conflict disclosure document, since in-house personnel
would presumably be more knowledgeable about conflicts of interest.
---------------------------------------------------------------------------

    \628\ This estimate is based on the following calculation: (1
hour per broker-dealer) x (802 small broker-dealers) = 802 aggregate
burden hours.
    \629\ This estimate is based on the following calculation: (2
hours per broker-dealer) x (2,055 large broker-dealers) = 4,110
aggregate burden hours.
---------------------------------------------------------------------------

    With respect to ongoing delivery of the updated conflict disclosure
document, we estimate that this would take place among 40% of a broker-
dealer's retail customer accounts annually.\630\ We therefore estimate
that broker-dealers would incur an aggregate

ongoing burden of 761,600 hours, or 267 burden hours per broker-
dealer.\631\
---------------------------------------------------------------------------

    \630\ The Commission estimates that broker-dealers would update
fees and material conflicts of interest disclosure more frequently
than disclosure related to capacity or type and scope of services.
    \631\ This estimate is based on the following calculation: (40%
of 95.2 million retail customer accounts) x (.02 hours) = 761,600
aggregate burden hours. Conversely, (761,600 aggregate burden
hours)/(2,857 broker-dealers) = 267 hours per broker-dealer.
---------------------------------------------------------------------------

3. Care Obligation
    Under proposed Regulation Best Interest, prior to or at the time of
making the recommendation, a broker-dealer would be required to make a
reasonable effort to ascertain the potential risks and rewards
associated with the recommendation, and to determine whether the
recommendation could be in the best interest of at least some retail
customers. However, any PRA burdens or costs associated with the Care
Obligation are discussed below with respect to proposed Rule 17a-
3(a)(25).
4. Record-Making and Recordkeeping Obligations
    Records made and retained in accordance with the proposed
amendments to Rule 17a-3(a)(25) and 17a-4(e)(5) would (1) assist a
broker-dealer in supervising and assessing internal compliance with
Regulation Best Interest; and (2) assist the Commission and SRO staff
in connection with examinations and investigations.
    The record-making and recordkeeping costs and burdens associated
with the proposed amendments to Rule 17a-3(a)(25) and Rule 17a-4(e)(5)
are addressed below.
a. Record-Making
    Proposed Rule 17a-3(a)(25) would require a broker-dealer to make a
record of all information collected from and provided to the retail
customer pursuant to Proposed Regulation Best Interest. We understand
that broker-dealers currently make records of relevant customer
investment profile information, and we therefore assume that no
additional record-making obligations would arise as a result of broker-
dealers' or their registered representatives' collection of information
from retail customers.\632\
---------------------------------------------------------------------------

    \632\ The PRA burdens and costs arising from the requirement
that a record be made of all information provided to the retail
customer are accounted for in proposed Regulation Best Interest and
the Relationship Summary Proposal. With respect to the requirement
that a record be made of all information from the retail customer,
we believe that proposed Rule 17a-3(a)(25) would not impose any new
substantive burdens on broker-dealers. As discussed above, we
believe that the obligation to exercise reasonable diligence, care,
skill and prudence would not require a broker-dealer to collect
additional information from the retail customer beyond that
currently collected in the ordinary course of business even though a
broker-dealer's analysis of that information and any resulting
recommendation would need to adhere to the enhanced best interest
standard of Regulation Best Interest. See supra Section II.D.2.
---------------------------------------------------------------------------

    In addition, the proposed amendment to Rule 17a-3(a)(25) would
require a broker-dealer, ``for each retail customer to whom a
recommendation of any securities transaction or investment strategy
involving securities is or will be provided,'' to make a record of the
``identity of each natural person who is an associated person, if any,
responsible for the account.'' We understand that broker-dealers likely
make such records in the ordinary course of their business pursuant to
Exchange Act Rules 17a-3(a)(6) and (7). However, we are assuming, for
purposes of compliance with proposed Rule 17a-3(a)(25), that broker-
dealers would need to create a record, or modify an existing record, to
identify the associated person, if any, responsible for the account in
the context of proposed Regulation Best Interest.
(1) Initial Costs and Burdens
    We assume that broker-dealers would satisfy the record-making
requirement of the proposed amendment to Rule 17a-3(a)(25) by amending
an existing account disclosure document to include this information. We
believe that the inclusion of this information in an account disclosure
document would require, on average, approximately 1 hour per year for
outside counsel at small broker-dealers, at an average rate of $472/
hour, for an annual cost of $472 for each small broker-dealer to update
an account disclosure document. The projected initial, aggregate cost
for small broker-dealers would be $378,544.\633\ For broker-dealers
that are not small entities, we estimate that the initial burden would
be 2 hours for each broker-dealer: 1 hour for compliance personnel and
1 hour for legal personnel. We therefore believe the initial aggregate
burden for broker-dealers that are not small entities would be
approximately 4,110 burden hours.\634\ Finally, we estimate it would
require an additional 0.04 hours for the registered representative
responsible for the information (or other clerical personnel) to fill
out that information in the account disclosure document, for an
approximate total aggregate initial burden of 3,808,000 hours, or
approximately 1,333 hours per broker-dealer for the first year after
the rule is in effect.\635\ Because we have already included the costs
and burdens associated with the delivery of the amended account
disclosure document above, we need not include them in this section of
the analysis.
---------------------------------------------------------------------------

    \633\ This estimate is based on the following calculation: (1
hour per small broker-dealer) x (802 small broker-dealers) x ($472/
hour) = $378,544 in aggregate costs.
    \634\ This estimate is based on the following calculation: (2
burden hours per broker-dealer) x (2,055 large broker-dealers) =
4,110 aggregate burden hours.
    \635\ These estimates are based on the following calculations:
(0.04 hours per customer account) x (95.2 million retail customer
accounts) = 3,808,000 aggregate burden hours. Conversely, (3,808,000
burden hours)/(2,857 broker-dealers) = 1,333 hours per broker-
dealer.
---------------------------------------------------------------------------

(2) Ongoing Costs and Burdens
    We do not believe that the identity of the registered
representative responsible for the retail customer's account would
change. Accordingly, we believe that there are no ongoing costs and
burdens associated with this record-making requirement of the proposed
amendment to Rule 17a-3(a)(25).
b. Recordkeeping Obligations
    For each record made pursuant to proposed Rule 17a-3(a)(25), the
proposed amendment to Rule 17a-4(e)(5) would require broker-dealers to
retain ``all account record information required pursuant to
[Regulation Best Interest] and all records required pursuant to
[Regulation Best Interest], in each case until at least six years after
the earlier of the date the account was closed or the date on which the
information was collected, provided, replaced, or updated.'' As
discussed above, the following records would likely need to be retained
pursuant to proposed Rule 17a-3(a)(25): (1) A standardized Relationship
Summary document, developed in accordance with the rules and guidance
contained in the Relationship Summary Proposal; (2) existing account
disclosure documents; (3) a comprehensive fee schedule; and (4)
disclosures identifying material conflicts.
(1) Initial Costs and Burdens
    We believe that, to reduce costs and for ease of compliance,
broker-dealers would utilize their existing recordkeeping systems in
order to retain the forgoing records made pursuant to Regulation Best
Interest, and as required to be kept under the Proposed Amendment to
Rule 17a-4(e)(5). As noted above, broker-dealers currently are subject
to recordkeeping obligations pursuant to Rule 17a-4, which require, for
example, broker-dealers to ``preserve for a period of not less than six
years, the first two years in an easily accessible place, all records
required to be made pursuant to'' Rule 17a-3(a)(1), (a)(2), (a)(3),
(a)(5), (a)(21), (a)(22), and analogous records created pursuant to
paragraph 17a-3(f). Thus, for example,

broker-dealers are already required to maintain documents such as
account blotters and ledgers for six years.
    We believe that broker-dealers would leverage their existing
recordkeeping systems to include any additional or amended records
required by Regulation Best Interest or pursuant to Proposed Amendment
to Rule 17a-4(e)(5), and would similarly leverage their existing
recordkeeping systems to account for any differences in the retention
period. Thus, where broker-dealers currently retain documents on an
electronic database to satisfy existing Rule 17a-4 or otherwise, we
would expect broker-dealers to maintain any additional documents
required by Regulation Best Interest or Proposed Amendment to Rule 17a-
4(e)(5) by the same means. Likewise, where broker-dealers maintain
documents required by existing Rule 17a-4 by paper, we would expect
broker-dealers to continue to do so.
    Based on the assumption that broker-dealers will rely on existing
infrastructures to satisfy the recordkeeping obligations of Regulation
Best Interest and Proposed Amendment to Rule 17-a(4)(e)(5), we believe
the burden for broker-dealers to add new documents or modify existing
documents to the broker-dealer's existing retention system would be
approximately 15.9 million burden hours for all broker-dealers,
assuming a broker-dealer would need to upload or file each of the five
account documents discussed above for each retail customer
account.\636\ We do not believe there would be additional internal or
external costs relating to the uploading or filing of the documents,
nevertheless, we request comment on this assumption and whether the new
requirements would pose additional costs, for example, relating to
storage space for paper or relating to additional electronic database
storage space. In addition, because we have already included the costs
and burdens associated with the delivery of the amended account opening
agreement and other documents above, we do not include them in this
section of the analysis.
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    \636\ This estimate is based on the following calculation: (5
documents per customer account) x (95.2 million retail customer
accounts) x (2 minutes per document)/60 minutes = 15,866,667
aggregate burden hours.
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(2) Ongoing Costs and Burdens
    We estimate that the approximate ongoing burden associated with the
recordkeeping requirement of proposed amendment to Rule 17a-4(e)(5) is
3.17 million burden hours per year.\637\ We do not believe that the
ongoing costs associated with ensuring compliance with the retention
schedule would change from the current costs of ensuring compliance
with existing Rule 17a-4 and as outlined above. However, we request
comment regarding both the frequency with which a broker-dealer would
need to collect, provide, replace, or update the records made pursuant
to the proposed amendment to Rule 17a-3(a)(25), and also on whether
there would be additional costs relating to ensuring compliance with
record retention and retention schedules pursuant to Rule 17a-4.
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    \637\ This estimate is based on the percentage of account
records we expect would be updated each year as described in Section
V.B.2, supra, and the following calculation: (40% of fee schedules x
95.2 million retail customer accounts) x (2 minutes per document) +
(40% of conflict disclosure forms x 95.2 million retail customer
accounts) x (2 minutes per document) + (20% of account opening
documents x 95.2 million retail customer accounts) x (2 minutes per
document) = 3,173,334 aggregate ongoing burden hours.
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C. Collection of Information Is Mandatory

    The collections of information relating to: (1) ``Regulation Best
Interest;'' (2) the Proposed Amendment to Rule 17a-3--Records to be
Made by Certain Exchange Members, Brokers and Dealers (OMB control
number 3235-0033); and (3) the Proposed Amendment to Rule 17a-4--
Records to be Preserved by Certain Brokers and Dealers (OMB control
number 3235-0279) are mandatory for all broker-dealers.

D. Confidentiality

    With respect to written disclosure provided to the retail customer
as required by Regulation Best Interest, such disclosure would not be
kept confidential. Other information provided to the Commission in
connection with staff examinations or investigations would be kept
confidential, subject to the provisions of applicable law.

E. Request for Comment

    The Commission is using the above estimates for the purposes of
calculating reporting burdens associated with Regulation Best Interest,
the Proposed Amendment to Rule 17a-3 and the Proposed Amendment to Rule
17a-4. We request comment on our estimates for the new and recurring
burdens and associated costs described above in connection with
Regulation Best Interest. In addition to the request for comments made
throughout this Section V, the Commission more generally seeks comment
on its estimates as to: (1) The number of natural persons who are
associated persons; (2) the number of broker-dealers that make
securities-related recommendations to retail customers; (3) the number
of natural persons who are associated persons that make securities-
related recommendations to retail customers; and (4) any other costs or
burdens associated with Regulation Best Interest that have not been
identified in this release.
    The Commission additionally invites comment on any other issues
related to the costs and burdens associated with Regulation Best
Interest. Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in
order to:
     Evaluate whether the proposed collection of information is
necessary for the performance of our functions, including whether the
information will have practical utility;
     evaluate the accuracy of our estimates of the burdens of
the proposed collections of information;
     determine whether there are ways to enhance the quality,
utility and clarity of the information to be collected; and
     evaluate whether there are ways to minimize the burden of
the collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
    Persons wishing to submit comments on the collection of information
requirements of Regulation Best Interest should direct them to (1) the
Office of Management and Budget, Attention: Desk Officer for the
Securities and Exchange Commission, Office of FOIA Services,
Washington, DC 20503; and (2) Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090,
with reference to File No. S7-XX-XX. Requests for materials submitted
to OMB by the Commission with regard to this collection of information
should be in writing, with reference to File No. S7-XX-XX, and be
submitted to the Securities and Exchange Commission, Office of Investor
Education and Advocacy, 100 F Street NE, Washington, DC 20549-0213. OMB
is required to make a decision concerning the collections of
information between 30 and 60 days after publication, so a comment to
OMB is best assured of having its full effect if OMB receives it within
30 days of publication.

VI. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of

1996, or ``SBREFA,'' \638\ the Commission must advise the OMB as to
whether the proposed regulation constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in:
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    \638\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
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     An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
     a major increase in costs or prices for consumers or
individual industries; or
     significant adverse effect on competition, investment or
innovation. If a rule is ``major,'' its effectiveness will generally be
delayed for 60 days pending Congressional review.
    The Commission requests comment on the potential impact of
Regulation Best Interest and the Proposed Amendment to Rule 17a-4(e)(5)
on:
     The U.S. economy on an annual basis,
     Any potential increase in costs or prices for consumers or
individual industries, and
     Any potential effect on competition, investment, or
innovation.
    Commenters are requested to provide empirical data and other
factual support for their view to the extent possible.

VII. Initial Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (``RFA'') \639\ requires federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \640\ of the Administrative Procedure
Act,\641\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \642\ Under Section 605(b) of the RFA, a federal
agency need not undertake a regulatory flexibility analysis of proposed
rules where, if adopted, they would not have a significant economic
impact on a substantial number of small entities.\643\
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    \639\ 5 U.S.C. 601 et seq.
    \640\ 5 U.S.C. 603(a).
    \641\ 5 U.S.C. 551 et seq.
    \642\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
small entity for the purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in Rule 0-10 under the Exchange Act, 17
CFR 240.0-10.
    \643\ See 5 U.S.C. 605(b).
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A. Reasons for and Objectives of the Proposed Action

    As discussed above in Section I, the Commission is proposing
Regulation Best Interest to establish a standard of conduct for broker-
dealers and natural persons who are associated persons of a broker-
dealer when making a recommendation of any securities transaction or
investment strategy involving securities to a retail customer. While
broker-dealers are subject to extensive existing obligations, there is
no specific obligation under the Exchange Act that broker-dealers make
recommendations that are in their customers' best interest. The
Commission believes it is appropriate to make enhancements to the
obligations that apply when broker-dealers make recommendations to
retail customers.
    The proposed standard of conduct is to act in the best interest of
the retail customer at the time a recommendation is made without
placing the financial or other interest of the broker-dealer or natural
person who is an associated person making the recommendation ahead of
the interest of the retail customer. This obligation shall be satisfied
if: The broker-dealer or a natural person who is an associated person
of a broker-dealer, before or at the time of such recommendation
reasonably discloses to the retail customer, in writing, the material
facts relating to the scope and terms of the relationship, and all
material conflicts of interest associated with the recommendation; the
broker-dealer or a natural person who is an associated person of a
broker-dealer, in making the recommendation, exercises reasonable
diligence, care, skill, and prudence; the broker-dealer establishes,
maintains, and enforces written policies and procedures reasonably
designed to identify and at a minimum disclose, or eliminate, all
material conflicts of interest that are associated with such
recommendations; and the broker-dealer establishes, maintains, and
enforces 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.
    The Commission's objectives in proposing Regulation Best Interest
are to: (1) Enhance the quality of recommendations provided by broker-
dealers to retail customers, by establishing under the Exchange Act a
``best interest'' care obligation that encompasses and goes beyond
existing broker-dealer suitability obligations under the federal
securities laws and that cannot be satisfied through disclosure
alone,\644\ and further establishing obligations under the Exchange Act
that require mitigation, and not just disclosure, of conflicts of
interest arising from financial incentives, and thus helps to reduce
the potential harm resulting from such conflicts; (2) help retail
customers evaluate recommendations received from broker-dealers, as
well as address confusion regarding the broker-dealer relationship
structure, by improving the disclosure of information regarding broker-
dealer conflicts of interest and the material facts relating to scope
and terms of the relationship with the retail customer; (3) facilitate
more consistent regulation of substantially similar activity,
particularly across retirement and non-retirement assets held at
broker-dealers, and in this manner help to reduce investor confusion;
(4) better align the legal obligations of broker-dealers with
investors' reasonable expectations; and (5) help preserve investor
choice and access to affordable investment advice and products that
investors currently use. Each of these objectives is discussed in more
detail in Section I.B., supra.
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    \644\ See supra note 7.
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    Furthermore, the proposed addition of paragraph (a)(25) to Rule
17a-3 would impose new record-making obligations on broker-dealers
subject to Regulation Best Interest,\645\ while the Proposed Amendment
to Rule 17a-4(e)(5) would impose new record retention obligations on
broker-dealers subject to Regulation Best Interest.\646\
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    \645\ As described in Section II.E. supra, the Commission is
proposing to amend Rule 17a-3 to add a new paragraph (a)(25), which
would require, for each retail customer to whom a recommendation of
any securities transaction or investment strategy involving
securities is or will be provided, a record of all information
collected from and provided to the retail customer pursuant to
Regulation Best Interest, as well as the identity of each natural
person who is an associated person of a broker or dealer, if any,
responsible for the account.
    \646\ As described in Section II.E. supra, the Commission is
proposing to amend Exchange Act Rule 17a-4(e)(5) to require broker-
dealers to retain a record of all information collected from and
provided to the retail customer pursuant to Rule 17a-3(a)(25), in
addition to the existing requirement to retain information obtained
pursuant to Rule 17a-3(a)(17). As a result, broker-dealers would be
required to retain all of the information collected from or provided
to each retail customer pursuant to Regulation Best Interest for six
years.
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B. Legal Basis

    Pursuant to the Dodd-Frank Wall Street Reform and Consumer
Protection Act Section 913(f), Public Law 111-203, 124 Stat. 1376, 1827
(2010), and Exchange Act sections 3, 10, 15, 17, 23 and 36 thereof, 15
U.S.C. 78c, 78j, 78o, 78q, 78w and 78mm, the Commission is

proposing to adopt Sec.  240.15l-1, to amend Sec.  240.17a-3 by adding
new paragraph (a)(25), and to revise Sec.  240.17a-4(e)(5) of Title 17
of the Code of Federal Regulations.

C. Small Entities Subject to the Proposed Rule

    For purposes of a Commission rulemaking in connection with the RFA,
a broker-dealer will be deemed a small entity if it: (1) Had total
capital (net worth plus subordinated liabilities) of less than $500,000
on the date in the prior fiscal year as of which its audited financial
statements were prepared pursuant to Rule 17a-5(d) under the Exchange
Act,\647\ or, if not required to file such statements, had total
capital (net worth plus subordinated liabilities) of less than $500,000
on the last day of the preceding fiscal year (or in the time that it
has been in business, if shorter); and (2) is not affiliated with any
person (other than a natural person) that is not a small business or
small organization.\648\
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    \647\ See 17 CFR 240.17a-5(d).
    \648\ See 17 CFR 240.0-10(c).
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    As discussed in Section V, supra, the Commission estimates that
approximately 2,857 retail broker-dealers would be subject to
Regulation Best Interest and the proposed amendment to Rules 17a-3 and
17a-4. Based on FOCUS Report data,\649\ the Commission estimates that
as of December 31, 2017, approximately 802 of those retail broker-
dealers might be deemed small entities for purposes of this
analysis.\650\ For purposes of this RFA analysis, we refer to broker-
dealers that might be deemed small entities under the RFA as ``small
entities,'' and we continue to use the term ``broker-dealers'' to refer
to broker-dealers generally, as the term is used elsewhere in this
release.\651\
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    \649\ See note 538, supra.
    \650\ According to the FOCUS data, there are 1,040 broker-
dealers that might be deemed small entities, but only 77% of those
small entities (802 firms) have retail business and would be subject
to Regulation Best Interest and the proposed amendments to Rules
17a-3 and 17a-4.
    \651\ Consistent with the PRA, unless otherwise noted, we use
the terms ``registered representative'' and ``dually registered
representative of a broker-dealer'' herein. See supra note 534.
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D. Projected Compliance Requirements of the Proposed Rule for Small
Entities

    The RFA requires a description of the projected reporting,
recordkeeping, and other compliance requirements of proposed Regulation
Best Interest and the proposed rule and rule amendments to Rules 17a-
3(a)(25) and 17a-4(e)(5), including an estimate of the classes of small
entities that will be subject to the requirements and the type of
professional skill necessary to prepare required reports and records.
Following is a discussion of the associated costs and burdens of
compliance with proposed Regulation Best Interest, as incurred by small
entities.
1. Conflict of Interest Obligations
    As described more fully above in Section V.D.1., the Conflict of