help to ameliorate this confusion by helping retail investors
understand the services that a particular firm offers, and how those
services differ based on whether the firm is a registered broker-
dealer, registered investment adviser, or both. We preliminarily
believe, however, that Form CRS is not a complete remedy for investor
confusion. The education and information that Form CRS provides to
retail investors could potentially be overwhelmed by the way in which
financial professionals present themselves to potential or current
retail investors, including through advertising and other
communications. This could particularly be the case where the
presentation could be misleading in nature, or where advertising and
communications precede the delivery of Form CRS and may have a
disproportionate impact on shaping or influencing retail investor
perceptions.
---------------------------------------------------------------------------

    \374\ See, e.g., Siegel & Gale Study, supra note 5; RAND Study,
supra note 5; 913 Study, supra note 3. Additionally, the RAND Study
noted that participants ``commented that the interchangeable titles
and `we do it all' advertisements [by broker-dealers] made it
difficult to discern broker-dealers from investment advisers.''
Those participants also stated that these lines were further blurred
by the marketing efforts which depicted an ``ongoing relationship
between the broker and the investor. . . .'' See RAND Study, supra
note 5, at xix, 19.
---------------------------------------------------------------------------

    Specifically, we believe that certain names or titles used by
broker-dealers, including ``financial advisor,'' contribute to retail
investor confusion about the distinction among different firms and
investment professionals, and thus could mislead retail investors into
believing that they are engaging with an investment adviser--and are
receiving services commonly provided by an investment adviser and
subject to an adviser's fiduciary duty, which applies to the retail
investors' entire relationship--when they are not.\375\ Additionally,
broker-dealers and investment advisers, and the financial professionals
that are associated with them, currently engage in communications with
prospective or existing retail investors without making clear whether
they are a broker-dealer or an investment adviser, which can further
confuse retail investors if this distinction is not clear from context
(whether intentionally or not).
---------------------------------------------------------------------------

    \375\ See supra notes 122 and 216 and accompanying texts.
---------------------------------------------------------------------------

    As discussed below, our proposed restriction seeks to mitigate the
risk that the names or titles used by a firm or financial professional
result in retail investors being misled, including believing that the
financial professional is a fiduciary, leading to uninformed decisions
regarding which firm or financial professional to engage, which may in
turn result in investors being harmed. Additionally, we believe that
requiring firms and their associated natural persons or supervised
persons to disclose whether the firms are broker-dealers or investment
advisers and whether such financial professionals are associated with
or supervised by, respectively, such firms would also help to address
investor confusion and mitigate potential harm to investors resulting
from that confusion. We preliminarily believe that restricting certain
persons from using the term ``adviser'' or ``advisor'' coupled with the
requirement that firms disclose their regulatory status in retail
investor communications would deter potentially misleading sales
practices. Investors who understand whether their financial
professional or firm is a broker-dealer or investment adviser will be
better consumers of the information presented in Form CRS, and less
likely to mistakenly obtain the services of a broker-dealer when they
intend to engage an investment adviser, or vice versa.\376\
---------------------------------------------------------------------------

    \376\ Section 15(l)(2) of the Exchange Act and section 211(h)(2)
of the Advisers Act.
---------------------------------------------------------------------------

A. Investor Confusion

    Over the past decade, various studies have documented that retail
investors are confused regarding the services offered by, and the
standards of conduct applicable to, broker-dealers and investment
advisers, including their use of certain titles.\377\
---------------------------------------------------------------------------

    \377\ See, e.g., Siegel & Gale Study, supra note 5; RAND Study,
supra note 5; 913 Study, supra note 3.
---------------------------------------------------------------------------

    In 2005, the Siegel & Gale Study found that with respect to titles
specifically, ``[r]espondents in all focus groups were generally
unclear about the distinctions among the titles brokers, financial
advisors/financial consultants, investment advisers, and financial
planners . . .'' \378\ The following year, the Commission retained RAND
to conduct a study of broker-dealers and investment advisers for the
purpose of examining, among other things, whether investors understood
the duties and obligations owed by investment advisers and broker-
dealers.\379\ The RAND Study

noted that ``thousands of firms'' are structured in a variety of ways
and provide various different combinations of services and
products.\380\ The RAND Study concluded that ``partly because of this
diversity of business models and services, investors typically fail to
distinguish broker-dealers and investment advisers along the lines
defined by federal regulations.'' \381\
---------------------------------------------------------------------------

    \378\ See Siegel & Gale Study, supra note 5, at 2. The study
used focus groups in both Baltimore, MD and Memphis, TN to ``explore
investor opinions regarding the services, compensation and legal
obligations of several types of financial services professionals.''
Id., at 5.
    \379\ See RAND Study, supra note 5, at xiv. In conducting the
study, RAND used several methods to study current practices in the
financial industry and analyze whether investors understand
differences between types of financial service professionals. Among
these methods, RAND sent out national household surveys through the
internet which studied ``household investment behavior and
preferences, experience with financial service providers, and
understanding of the different types of financial service
providers.'' Additionally, RAND conducted six focus groups with
investors in Alexandria, Virginia, and Fort Wayne, Indiana to gain
additional evidence on investor beliefs about and experience with
financial service providers. RAND also conducted two sets of [in
person] interviews: one set of interviews with interested parties
and one set with financial service firms. See RAND Study, supra note
5, at 3[dash]4.
    \380\ See RAND Study, supra note 5, at 118.
    \381\ Id.
---------------------------------------------------------------------------

    The RAND Study concluded that, based on interviews with industry
representatives, investor surveys, and focus groups, there was
generally investor confusion about the distinction between broker-
dealers and investment advisers. In particular, ``[interview]
participants [in the RAND Study] mentioned that the line between
investment adviser and broker-dealers has become further blurred, as
much of the recent marketing by broker-dealers focuses on the ongoing
relationship between the broker and the investor and as brokers have
adopted such titles as `financial advisor' and `financial manager.' ''
\382\ Additionally, participants in RAND's survey believed that
financial professionals using the title ``financial advisor'' were
``more similar to investment advisers than to brokers . . .'' \383\
---------------------------------------------------------------------------

    \382\ See id., at 19.
    \383\ See id., at xix.
---------------------------------------------------------------------------

    Moreover, focus group participants shed further light on this
confusion when they ``commented that the interchangeable titles and `we
do it all' advertisements by broker-dealers made it difficult to
discern broker-dealers from investment advisers.'' \384\ More
specifically, focus group participants observed that ``common job
titles for investment advisers and broker-dealers are so similar that
people can easily get confused over the type of professional with which
they are working.'' \385\ The focus group results also showed that when
``[c]omparing beliefs on services provided by investment advisers to
services provided by brokers, participants were more likely to say that
investment advisers provide advice about securities, recommend specific
investments, and provide planning services.'' \386\ According to the
RAND Study, focus-group participants were more likely to say that
brokers rather than investment advisers execute stock transactions and
earn commissions and believed ``that investment advisers and brokers
are required to act in the client's best interest'' and ``were more
likely to say that brokers rather than investment advisers are required
to disclose any conflicts of interest.'' \387\ In highlighting part of
the confusion, the RAND Study noted that the responses from survey
participants indicated the opposite conclusion from those of the focus-
group participants, namely, that investment advisers are more likely to
disclose conflicts of interest.\388\
---------------------------------------------------------------------------

    \384\ See id., at xix. Interview participants also stated that
these lines were further blurred by the marketing efforts which
depicted an ``ongoing relationship between the broker and the
investor. . . .''. See id., at 19.
    \385\ See id., at 111.
    \386\ See id., at 109.
    \387\ Id.
    \388\ Id.
---------------------------------------------------------------------------

    As discussed above, in light of significant intervening market
developments and advances in technology, Chairman Clayton in 2017
invited input on, among other things, investor concerns about the
current regulatory framework. Commenters highlighted the risk of harm
to investors who obtain services from broker-dealers under the
misimpression that they are receiving services protected by the
fiduciary duty that applies to investment advisers.\389\ For example,
one commenter examined the websites of nine different brokerage firms
and ``found that the firms' advertising presents the image that the
firms are acting in a fiduciary capacity'' with many firm
advertisements continuing to present the firm ``as providing all-
encompassing advice, with no differentiation between the firms'
investment adviser services and brokerage services.'' \390\ This
commenter also noted that ``[w]ithout uniform standards, persons
seeking financial advice are left to fend for themselves in deciding
whether their financial advisor is serving two masters or only one, and
whether one of those masters is the advisor's financial self-
interest.'' \391\ In addition, a different commenter argued that the
use of certain titles, such as ``advisor,'' should be standardized by
the Commission because they are currently ``catch all'' terms for firms
with ``wildly different practices, standards, and responsibilities to
their clients.'' \392\ Some of the commenters to Chairman Clayton's
Request for Comment also noted that this confusion is the result of the
misleading nature of these titles. Specifically, one commenter stated
that ``[t]he problem is that investors are being misled into relying on
biased sales recommendations as if they were objective, best interest
advice and are suffering significant financial harm as a result.''
\393\ The commenter noted that ``these titles and marketing materials
are misleading'' [if] . . . broker-dealers truly are the ``mere
salespeople they've claimed to be in their legal challenge to the DOL
fiduciary rule.'' \394\ A different commenter stated that ``a financial
professional should not be able to use a title that conveys a standard
of conduct to which the professional is not in fact held under the law.
. . .'' \395\ Additionally, another commenter noted that customer
confusion is ``also driven by misleading marketing and misleading
titles.'' \396\ Finally, one commenter stated that ``having SEC
registered entities and their agent, claim such title gives false
credence and implies a responsibility which the agent never claims to
provide (numerous brokers go by the title `Financial Advisor', implying
Fiduciary standard that is not being upheld).'' \397\
---------------------------------------------------------------------------

    \389\ See, e.g., CFA 2017 Letter; PIABA 2017 Letter; IAA 2017
Letter; Pefin 2017 Letter; First Ascent 2018 Letter.
    \390\ See PIABA 2017 Letter, at 7. See also IAA 2017 Letter, at
11 (``investor confusion persists where certain financial
professionals are permitted to use terms such as ``financial
adviser'' or ``financial advisor'' that imply a relationship of
trust and confidence but, in effect, disclaim fiduciary
responsibility for such a relationship''); Pefin 2017 Letter, at 3
(noting that `` `Investment Advisor' or `Financial Advisor' are not
defined terms, and are currently a ``catch all'' for firms with
wildly different practices, standards, and responsibilities to their
clients. Many of these firms attempt to imply in external
communication that they are a Fiduciary, while disclaiming their
responsibilities in the fine print.''); CFA 2017 Letter.
    \391\ See PIABA 2017 Letter, at 17.
    \392\ See Pefin 2017 Letter, at 3. See also First Ascent 2017
Letter.
    \393\ See CFA 2017 Letter, at 2.
    \394\ See id., at 11.
    \395\ See Comment letter of the U.S. Chamber of Commerce (Dec.
13, 2017), at 10.
    \396\ See Comment letter of the Steering Group for the Committee
for the Fiduciary Standard (Nov. 8, 2017) (``Committee for the
Fiduciary Standard 2017 Letter''), at 3.
    \397\ See Pefin 2017 Letter, at 9.
---------------------------------------------------------------------------

    For many years, the Commission has considered approaches for
remedying investor confusion about the differing services and
obligations of broker-dealers and investment advisers. In particular,
in 2005 we considered addressing how investors perceive the differences
between broker-dealers and investment advisers by proposing to
proscribe the use of certain broker-dealer titles.\398\ In adopting our
final rule, which was subsequently vacated on other grounds by the
Court of

Appeals for the D.C. Circuit,\399\ we declined to follow this approach,
believing that the better approach was to require broker-dealers to
clearly inform their customers receiving investment advice that they
are entering into a brokerage, and not an advisory, relationship.\400\
However, in light of comments in response to Chairman Clayton's Request
for Comment and our experience, we believe that it is appropriate to
revisit that approach.
---------------------------------------------------------------------------

    \398\ Certain Broker-Dealers Deemed Not To Be Investment
Advisers, Exchange Act Release No. 50980 (Jan. 6, 2005), [70 FR 2716
(Jan. 14, 2005)] (``Broker Dealer Reproposing Release'').
    \399\ Financial Planning Association v. Securities and Exchange
Commission, 482 F.3d 481 (D.C. Cir. 2007).
    \400\ As further discussed in the 2005 final rule release, we
considered but did not adopt a rule which would have placed
limitations on how a broker-dealer may hold itself out or titles it
may employ without registering as an investment adviser and
complying with the Advisers Act. In deciding to not prohibit the use
of specific titles such as ``financial advisor,'' ``financial
consultant'' or other similar names, we noted that ``the statutory
broker-dealer exception is a recognition by Congress that a broker-
dealer's regular activities include offering advice that could bring
the broker-dealer within the definition of investment adviser, but
which should nonetheless not be covered by the Act.'' As a result,
we noted that the ``terms `financial advisor' and `financial
consultant,' for example, were descriptive of such services provided
by broker-dealers.'' We also stated our view that these titles were
generic terms that describe what various persons in the financial
services industry do, including banks, trust companies, insurance
companies, and commodity professionals. See 2005 Broker Dealer
Release, supra note 7; see also Broker Dealer Reproposing Release,
supra note 398.
---------------------------------------------------------------------------

    A broker-dealer can, and does, provide investment advice to retail
investors without being regulated as an investment adviser, provided
that such advice is ``solely incidental to'' its brokerage business and
the broker-dealer receives no ``special compensation'' for the
advice.\401\ While we believe such advice is important for providing
retail investors access to a variety of services, products, and payment
options, for example, thereby increasing investor choice, we are
concerned that use of the terms ``adviser'' and ``advisor'' in a name
or title would continue to result in some retail investors being misled
that their firm or financial professional is an investment adviser
(i.e., a fiduciary), resulting in investor harm. We believe that these
terms can obscure the fact that investment advisers and broker-dealers
typically have distinct business models with varying services, fee
structures, standards of conduct, and conflicts of interest.\402\
---------------------------------------------------------------------------

    \401\ The Advisers Act regulates the activities of certain
``investment advisers,'' which are defined in section 202(a)(11) as
persons who receive compensation for providing advice about
securities as part of a regular business. Broker-dealers are
excluded from the definition of investment adviser by section
202(a)(11)(C) provided that they meet two prongs: (i) The broker-
dealer's advisory services must be ``solely incidental to'' its
brokerage business; and (ii) the broker-dealer must receive no
``special compensation'' for the advice.
    \402\ See RAND Study, supra note 5, at 18 (``There were also
concerns as to what investors understand regarding similarities and
differences of brokerage and advisory accounts, the legal
obligations of each type of account, and the effect of titles and
marketing used by investment professionals on the expectations of
investors.'').
---------------------------------------------------------------------------

    It is important for retail investors to better understand the
distinction between investment advisers and broker-dealers and to have
access to the information necessary to make an informed choice and
avoid potential harm. Investor choices of firm type and financial
professionals can, for example, affect the extent or type of services
received, the amount and type of fees investors pay for such services,
and the conflicts of interest associated with any such services. For
example, if a retail investor prefers an advisory relationship with an
active trading strategy, and he or she mistakenly retains a broker-
dealer ``financial adviser,'' this investor potentially could incur
more costs if he or she is placed in a brokerage account than he or she
would have paid in an advisory account with an asset-based fee.
Likewise, an investor could also be misled into believing that the
broker-dealer is subject to a fiduciary standard that may not
apply,\403\ and provides services it may not offer, such as regular
monitoring of the account, offering advice on a regular basis, and
communicating with the investor on a regular basis.
---------------------------------------------------------------------------

    \403\ See supra note 375. Cf. Comment letter of Russel Walker
(Jun. 17, 207); Comment letter of Jeanne Davis (Jul. 20, 2017);
Comment letter of Nancy Lowell (Jul. 20, 2017); Comment letter of
John Dalton (Jul. 21, 2017); Comment letter of Nancy Tew (Jul. 21,
2017); Comment letter of Bonitta Knapp (Jul. 21, 2017); Comment
letter of Alan Gazetski (Jul. 21, 2017); Comment letter of A. Arias
(Jul. 21, 2017); Comment letter of Al Cohen (Jul. 21, 2017); Comment
letter of James Melloh (Jul. 21, 2017); Comment letter of Mary
Pellecchia (Jul. 21, 2017); Comment letter of William Muller (Jul.
21, 2017); Comment letter of Susan Lee (Jul. 22, 2017); Comment
letter of Steve Daniels (Jul. 22, 2017); AARP 2017 Letter; AFL-CIO
2017 Letter; Pefin 2017 Letter; PIABA 2017 Letter; IAA 2017 Letter;
CFA 2017 Letter. These commenters argued that as a result of the use
of certain titles and communications, retail investors are confused
and are erroneously led to believe that their financial
professionals are required to act ``in their best interest.''
---------------------------------------------------------------------------

    While we are proposing to require broker-dealers and investment
advisers to provide retail investors with a relationship summary that
would highlight certain features of an investment advisory or brokerage
relationship, that information might be provided after the retail
investor has initially decided to meet with the firm or its financial
professional. The retail investor may make a selection based on such
person's name or title. If firms and financial professionals that are
not investment advisers are restricted from using ``adviser'' or
``advisor'' in their names or titles, retail investors would be less
likely to be confused or potentially misled about the type of financial
professional being engaged or nature of the services being received.
Conversely, an associated natural person of a broker-dealer using the
term ``adviser'' or ``advisor'' may result in an investor believing
that such financial professional is an adviser with a fiduciary duty,
as discussed in the relationship summary the investor would
receive.\404\ Similarly, requiring firms and their associated natural
persons or supervised persons, as applicable, to disclose whether the
firms are broker-dealers or investment advisers would help to address
investor confusion and complement the information provided in the
proposed relationship summary.
---------------------------------------------------------------------------

    \404\ See proposed Item 5.B.3. of Form CRS.
---------------------------------------------------------------------------

B. Restrictions on Certain Uses of ``Adviser'' and ``Advisor''

    We are proposing to restrict any broker or dealer, and any natural
person who is an associated person of such broker or dealer, when
communicating with a retail investor, from using as part of its name or
title the words ``adviser'' or ``advisor'' unless such broker or
dealer, is registered as an investment adviser under the Advisers Act
or with a state, or any natural person who is an associated person of
such broker or dealer is a supervised person of an investment adviser
registered under section 203 of the Advisers Act or with a state and
such person provides investment advice on behalf of such investment
adviser.\405\
---------------------------------------------------------------------------

    \405\ See Exchange Act proposed rule 151-2.
---------------------------------------------------------------------------

1. Firms Solely Registered as Broker-Dealers and Associated Natural
Persons
    In relevant part, the proposed rule would restrict a broker-
dealer's or its associated natural persons' use of the term ``adviser''
or ``advisor'' as part of a name or title when communicating with a
retail investor in particular circumstances.\406\ This would include
names or titles which include, in whole or in part, the term
``adviser'' or ``advisor'' such as financial advisor (or adviser),
wealth advisor (or adviser), trusted advisor (or adviser), and advisory
(e.g., ``Sample Firm Advisory'') when communicating with any retail
investor. In addition, we believe that the proposed rule should apply
to communications with retail investors (i.e., natural persons), rather
than

institutions, for reasons similar to those detailed above for the
relationship summary.\407\ Additionally, our proposed rule
appropriately applies to retail investors and not to institutions, as
institutions generally would be less likely to be misled by such names
or titles. The proposed rule, however, would not restrict a broker-
dealer's or its associated natural persons' use of the terms
``adviser'' or ``advisor'' when acting on behalf of a bank or insurance
company, or when acting on behalf of a municipal advisor or a commodity
trading advisor.
---------------------------------------------------------------------------

    \406\ See id.
    \407\ See supra note 29 and accompanying text. See also Exchange
Act proposed rule 151-2(b).
---------------------------------------------------------------------------

    We acknowledge that there may be titles other than ``adviser'' or
``advisor'' used by financial professionals that might confuse and thus
potentially mislead investors. We considered whether we should restrict
broker-dealers from using additional terms, such as, for example,
``financial consultant.'' Given this concern, we focused our proposal
on the terms ``adviser'' or ``advisor'' because they are more closely
related to the statutory term ``investment adviser.'' Thus, as compared
to additional terms such as ``financial consultant,'' ``adviser'' and
``advisor'' are more likely to be associated with an investment adviser
and its advisory activities rather than with a broker-dealer and its
brokerage activities. Moreover, the term ``investment adviser,'' as
compared to terms like ``financial consultant,'' is a defined term
under the Advisers Act as any person who, for compensation, engages in
the business of advising others, either directly or through
publications or writings, as to the value of securities.\408\ As
discussed above, we believe that use of the terms ``adviser'' and
``advisor'' by broker-dealers and their associated natural persons has
particularly contributed to investor confusion about the typical
services, fee structures, conflicts of interest, and legal standards of
conduct to which broker-dealers and investment advisers are
subject.\409\ Conversely, we preliminarily believe that other terms,
even if investors might find them confusing, unclear, or misleading (as
some commenters have suggested), do not necessarily imply that a firm
or its financial professional is an ``investment adviser'' who would
have the principal services, compensation structures, conflicts of
interest, disclosure obligations, and legal standards of conduct that
are typically associated with being an investment adviser.\410\
---------------------------------------------------------------------------

    \408\ See section 202(a)(11)(A) of the Advisers Act, defining an
``investment adviser'' as ``any person who, for compensation,
engages in the business of advising others, either directly or
through publications or writings, as to the value of securities or
as to the advisability of investing in, purchasing, or selling
securities, or who, for compensation and as part of a regular
business, issues or promulgates analyses or reports concerning
securities.''
    \409\ See supra note 402 and accompanying text. We are not
proposing restrictions on names or titles for investment advisers.
Our staff is not aware of an investment adviser using a name or
title that could cause retail investors to mistakenly believe that
such adviser provides brokerage services. Studies and commenters
also have not identified retail investor confusion as relating to an
investment adviser's use of names or titles. We request comment on
our understanding below.
    \410\ Firms and financial professionals should keep in mind the
applicability of the antifraud provisions of the federal securities
laws, including section 17(a) of the Securities Act, and section
10(b) of the Exchange Act and rule 10b-5 thereunder, to the use of
names or titles. See also generally FINRA Rule 2210 (stating in part
``[a]ll retail communications and correspondence must: (A)
Prominently disclose the name of the member, or the name under which
the member's broker-dealer business primarily is conducted as
disclosed on the member's Form BD, and may also include a fictional
name by which the member is commonly recognized or which is required
by any state or jurisdiction; (B) reflect any relationship between
the member and any non-member or individual who is also named; and
(C) if it includes other names, reflect which products or services
are being offered by the member.'')
---------------------------------------------------------------------------

    Accordingly, we preliminarily do not believe these terms would
cause retail investors to believe that their financial professional is
an investment adviser when he or she is, in fact, a broker-dealer. We
therefore preliminarily believe that restricting use of terms that are
similar to ``investment adviser'' appropriately tailors the rule to
terms that are likely to result in confusion or mislead retail
investors about whether such broker-dealer is an investment adviser and
thus a fiduciary.
    As we discuss in more detail above, the proposed relationship
summary is designed to provide clarity to retail investors regarding
information about broker-dealers and investment advisers under a
prescribed set of topics (e.g., services, fees, standards of conduct,
conflicts). While the proposed relationship summary is designed to help
retail investors to distinguish between investment advisers and broker-
dealers, we are concerned that the effectiveness of the relationship
summary could be undermined if we do not restrict a broker-dealer from
using in a name or title the terms ``adviser'' and ``advisor.''
    For instance, we preliminarily believe that restricting a broker-
dealer or its associated natural persons from using ``adviser'' or
``advisor'' in a name or title would mitigate the risk that a retail
investor would be misled into believing and expecting that his or her
``financial advisor,''--who may solely provide brokerage services at a
broker-dealer--is an investment adviser because of the name or title.
For example, if a retail investor were to engage a financial
professional with the title ``wealth advisor'' who solely provides
brokerage services but who is associated with a dually registered
firm,\411\ such investor would likely receive the dually registered
firm's relationship summary. The relationship summary would include a
description of both business models; however, the retail investor could
incorrectly match the services he or she would receive from such
``wealth advisor'' to the description in the relationship summary of
investment advisory services. As a result, the retail investor may be
misled to believe that the brokerage services provided by the ``wealth
advisor'' are in fact the investment advisory services as described in
the relationship summary.
---------------------------------------------------------------------------

    \411\ For the purposes of Section III, we are defining a
``dually registered firm'' in the same manner as it is defined in
the baseline of the Economic Analysis. See infra Section IV, note
453.
---------------------------------------------------------------------------

    Similarly, a retail investor who engages a financial professional
with the title ``wealth advisor'' who is associated solely with a
broker-dealer entity would likely receive the broker-dealer's
relationship summary, which focuses on the characteristics of the
broker-dealer business model. As a result, there would be an
inconsistency between the description of the broker-dealer business
model and the investors' likely perceptions that their professional is
an investment adviser. Therefore, the proposed restriction on the use
of names or titles would increase the effectiveness of the relationship
summary by reducing the risk of a mismatch between investor preferences
and type of services received.
    We acknowledge that studies have demonstrated that many retail
investors select financial professionals and firms based on personal
referrals by family, friends, or colleagues.\412\ Even if the name or
title of the firm or professional may not impact choices made by such
investors, we preliminarily believe that the protections offered to
other investors by the proposed restriction and disclosure requirements
justify the rules.
---------------------------------------------------------------------------

    \412\ See infra note 546 and accompanying text. See also Section
IV.A.3.g.
---------------------------------------------------------------------------

2. Dually Registered Firms and Dual Hatted Financial Professionals
    The proposed rule would permit firms that are registered both as
investment advisers (including state-registered investment advisers)
and broker-dealers to use the term ``adviser'' or ``advisor'' in their
name or title.\413\ The proposed

rule would, however, only permit an associated natural person of a
dually registered firm to use these terms where such person is a
supervised person of a registered investment adviser and such person
provides investment advice on behalf of such investment adviser.\414\
This would limit the ability of natural persons associated with a
broker-dealer who do not provide investment advice as an investment
adviser from continuing to use the term ``adviser'' or ``advisor''
simply by virtue of the fact that they are associated with a dually
registered firm.\415\ We discuss these aspects of the rule in further
detail below.
---------------------------------------------------------------------------

    \413\ See Exchange Act proposed rule 151-2(a)(1).
    \414\ See Exchange Act proposed rule 151-2(a)(2).
    \415\ See section 202(a)(25) of the Advisers Act [15 U.S.C. 80b-
2(a)(25)] defining ``supervised person'' as ``any partner, officer,
director (or other person occupying a similar status or performing
similar functions), or employee of an investment adviser, or other
person who provides investment advice on behalf of the investment
adviser and is subject to the supervision and control of the
investment adviser''.
---------------------------------------------------------------------------

a. Dually Registered Firms
    We are not proposing to apply the restriction to dually registered
firms. We believe that it is inappropriate to restrict a dually
registered firm from using a name or title that accurately describes
its registration status. We recognize that under our proposed rule
there might be occasions where a dually registered firm provides a
particular retail investor only brokerage services, which could lead to
some investor confusion.
    At the firm level, we do not believe that the determination of when
the restriction applies should be based on what capacity a dually
registered firm is acting in a particular circumstance, i.e., whether a
dually registered firm is acting solely as a broker-dealer and not
offering investment advisory services. If we were to apply the
restriction in this manner, it could result in firms using multiple
names and titles, which may lead to further confusion and create
operational and compliance complexities. Accordingly, this could lead
to dually registered firms avoiding the use of the title ``adviser'' or
``advisor'' unless they believe they would always offer investment
advisory services, which we believe is not necessary to avoid the
potential investor harm. Additionally, we also seek to avoid the
potential misimpression that may result should a firm use a name or
title to reflect only its brokerage services and not its investment
advisory services. In such a circumstance, a retail investor may not
know that such firm offers both business models and could be led to
believe that only brokerage services are available.
b. Dual Hatted Financial Professionals
    Dual hatted financial professionals of dually registered firms
(including state-registered investment advisers) can provide brokerage
services, advisory services, or both. We believe it is appropriate for
financial professionals that provide services as an investment adviser
to retail investors to be permitted to use names or titles which
include ``adviser'' and ``advisor,'' even if, as a part of their
business, they also provide brokerage services. As such, our proposed
rule would not restrict, for example, a financial professional that is
both a supervised person of an investment adviser and an associated
person of a broker-dealer from using the term ``adviser'' or
``advisor'' in his or her name or title if such person provides
investment advice to retail investors on behalf of the investment
adviser.\416\ We believe that the relationship summary can sufficiently
reduce the risk of investors being misled and avoid investor harm
because it contains parallel information with respect to each of the
services the dual hatted financial professional offers.
---------------------------------------------------------------------------

    \416\ See Exchange Act proposed rule 151-2(a)(2).
---------------------------------------------------------------------------

    By contrast, we recognize that some financial professionals of
dually registered firms only provide brokerage services. We are
concerned that if these financial professionals use ``adviser'' or
``advisor'' in their names or titles, retail investors may be misled
about the nature of services they are receiving, and may incorrectly
believe that such person would provide them investment advisory
services rather than brokerage services. Therefore, we believe that a
financial professional who does not provide investment advice to retail
investors on behalf of the investment adviser, i.e., a financial
professional that only offers brokerage services to retail investors,
should be restricted from using the title ``adviser'' or ``advisor''
despite such person's association with a dually registered firm.
    We recognize that, as with dually registered firms, some dual
hatted financial professionals may under some circumstances only offer
brokerage services to a particular retail investor, which has the
potential to cause confusion. For the same reasons discussed above
regarding dually registered firms, however, we do not believe that the
determination of when the restriction applies should be based on what
capacity a dual hatted financial professional is acting in a particular
circumstance, i.e., whether a dual hatted professional is offering only
brokerage services to that particular investor and not offering
investment advisory services.\417\ Moreover, we are proposing in
Regulation Best Interest to require a broker-dealer to make certain
disclosures, including the capacity of the financial professional and
firm.\418\ We request comment below on whether and if so how the
proposed rule should address this particular circumstance.
---------------------------------------------------------------------------

    \417\ See supra note 410. Firms and financial professionals
should keep in mind the applicability of the antifraud provisions of
the federal securities laws, including section 17(a) of the
Securities Act, and section 10(b) of the Exchange Act and rule 10b-5
thereunder, to the use of names or titles.
    \418\ See Regulation Best Interest Proposal, supra note 24.
---------------------------------------------------------------------------

C. Alternative Approaches

    Over the past decade, we and commenters have expressed concern
about broker-dealer marketing efforts, including through the use of
titles, and whether these efforts are consistent with a broker-dealer's
reliance on the exclusion from the definition of investment adviser
under section 202(a)(11)(C) of the Advisers Act.\419\ Under section
202(a)(11)(C), a broker-dealer is excluded from the definition of
investment adviser if its ``performance of [advisory] services is
solely incidental to the conduct of his business as a broker or dealer
and who receives no special compensation therefor.'' \420\ In this
regard, and as an alternative to our proposed rule today, we considered
proposing a rule which would have stated that a broker-dealer that uses
the term ``adviser'' or ``advisor'' as part of a name or title cannot
be considered to provide investment advice solely incidental to the
conduct of its business as a broker-dealer and therefore is not
excluded from the definition of investment adviser under section
202(a)(11)(C). We also considered proposing a rule that would preclude
a broker-dealer from relying on the exclusion when such a broker-dealer
held itself out as an investment adviser. We are not proposing these
alternatives for the reasons discussed below. However, we request
comment on these alternatives below.
---------------------------------------------------------------------------

    \419\ See, e.g., Comment letter of Investment Counsel
Association of America (Feb. 7, 2005) (``ICAA 2005 Letter); Comment
letter of T. Rowe Price (Feb. 22, 2005) (``T. Rowe Price 2005
Letter'') on Broker Dealer Reproposing Release, supra note 398. See
also Certain Broker-Dealers Deemed Not to Be Investment Advisers,
Exchange Act Release No. 42099 (Nov. 4, 1999) (``Release 42099'').
    \420\ Section 202(a)(11)(C) of the Advisers Act.
---------------------------------------------------------------------------

    Our concerns regarding broker-dealer marketing efforts are not new.
For example, we have previously requested comment on whether we should
preclude broker-dealers from relying on the solely incidental prong of
the exclusion if they market their services

in a manner that suggests that they are offering advisory accounts,
including through the use of names or titles.\421\ While we have never
viewed the broker-dealer exclusion as precluding a broker-dealer from
marketing itself as providing some amount of advisory services, we have
noted that these marketing efforts raised ``troubling questions as to
whether the advisory services are not (or would be perceived by
investors not to be) incidental to the brokerage services.'' \422\
Certain commenters have voiced similar concerns, arguing that the use
of certain titles, such as ``financial advisor,'' is inconsistent with
the broker-dealer exclusion, with some noting that the marketing of
advisory services by a broker-dealer is inconsistent with those
services being solely incidental to the brokerage business.\423\
Others, however, contended that the titles are consistent with the
services provided by broker-dealers, whether in fee-based or
commission-based accounts.\424\
---------------------------------------------------------------------------

    \421\ See, e.g., Release 42099, supra note 419.
    \422\ See id.
    \423\ See, e.g., ICAA 2005 Letter; T. Rowe Price 2005 Letter.
See also e.g. AFL-CIO 2017 Letter; CFA 2017 Letter; Comment letter
of CFA Institute (Jan. 10, 2018); Comment letter of The Committee
for the Fiduciary Standard (Jan. 12, 2018).
    \424\ See Broker Dealer Reproposing Release.
---------------------------------------------------------------------------

    Taking into account our concerns and the views of commenters, we
considered proposing a rule which would have stated that a broker-
dealer that uses the term ``adviser'' or ``advisor'' as part of a name
or title would not be considered to provide investment advice solely
incidental to the conduct of its brokerage business and therefore would
not be excluded from the definition of investment adviser under section
202(a)(11)(C) of the Advisers Act.\425\ In considering this
alternative, we questioned whether a broker-dealer that uses these
terms to market or promote its services to retail investors is doing so
because its advice is significant or even instrumental to its brokerage
business. Consequently, we questioned whether that broker-dealer's
provision of advice is therefore no longer solely incidental to its
brokerage business. Similarly, we believe that if a broker-dealer
invests its capital into marketing, branding, and creating intellectual
property in using the terms ``adviser'' or ``advisor'' in its name or
its financial professionals' titles, the broker-dealer is indicating
that advice is an important part of its retail investor broker-dealer
business. As compared to the more principles-based ``holding out''
approach below, this alternative may offer more certainty and clarity
to broker-dealers. It also specifically addresses our concerns about
the use of ``adviser'' and ``advisor,'' as discussed in this release.
---------------------------------------------------------------------------

    \425\ As with the proposal, our alternative approach would
likewise preclude an associated natural person of a dually
registered firm from using the term ``adviser'' or ``advisor'' in a
name or title unless he or she is a supervised person of an
investment adviser and provides investment advice on behalf of such
investment adviser.
---------------------------------------------------------------------------

    We also considered a broader approach that would have precluded a
broker-dealer from relying on the solely incidental exclusion of
section 202(a)(11)(C) if a broker-dealer ``held itself out'' as an
investment adviser to retail investors.\426\ For example, ``holding
out'' could encompass a broker-dealer that represented or implied
through any communication or other sales practice (including through
the use of names or titles) that it was offering investment advice to
retail investors subject to a fiduciary relationship with an investment
adviser. As with our alternative approach above, we questioned whether
these activities could suggest, or could reasonably be understood as
suggesting, that such broker-dealer or its associated natural persons
were performing investment advisory services in a manner that was not
solely incidental to their business as a broker-dealer. In particular,
this approach could reduce the risk that if we restricted certain
titles (or limited the use of certain titles used to market services)
other potentially misleading titles could proliferate. Certain
commenters to Chairman Clayton's Request for Comment also supported
this approach, so that retail investors receiving advice from firms
``holding out'' as investment advisers would receive appropriate
protections, either under the Advisers Act or through a heightened
standard of conduct for broker-dealers.\427\ However, we preliminarily
believe that a ``holding out'' approach would create uncertainty
regarding which activities (and the extent of such activities) would be
permissible. Such an approach could also reduce investor choice, as
broker-dealers may decide to provide fewer services out of an abundance
of caution.
---------------------------------------------------------------------------

    \426\ See AFL-CIO 2017 Letter, at 3 (stating that ``[o]ne way
for the SEC to proceed is to clarify that those firms that offer
advisory services, or hold themselves out as offering such services,
cannot take advantage of the existing broker-dealer `solely
incidental to' exemption from the Investment Advisers Act.''); IAA
2017 Letter; AICPA 2017 Letter.
    \427\ See IAA 2017 Letter, at 11 (``We urge the Commission to
address this source of investor confusion by prohibiting firms or
individuals from holding themselves out as trusted advisers without
being subject to either the Advisers Act fiduciary principles or a
new equally stringent best interest standard under the Exchange Act,
discussed above.''). See also, e.g. AFL-CIO 2017 Letter, at 3
(``clarify that those firms that offer advisory services, or hold
themselves out as offering such services, cannot take advantage of
the existing broker-dealer ``solely incidental to'' exemption from
the Investment Advisers Act. Permitting brokers to rely on this
exemption when engaged in advisory activities has had the effect of
exempting them from the fiduciary duty appropriate to that advisory
role. Adopting this approach would require the SEC to determine what
constitutes ``holding out'' as an adviser, addressing marketing
practices, as well as job titles, that create the reasonable
expectation among investors that they will receive advice and not
just sales recommendations.'').
---------------------------------------------------------------------------

    We are not proposing any of these approaches however, because we
preliminarily believe that a restriction on the use of ``adviser'' and
``advisor'' in names and titles in combination with the requirement to
deliver a relationship summary would be a simpler, more administrable
approach to address the confusion about the difference between
investment advisers and broker-dealers, and to prevent investors from
being potentially misled, compared to the alternatives presented above.
While we acknowledge that there are other titles or marketing
communications that may contribute to investor confusion or mislead
investors, our proposal is tailored toward creating greater clarity
with respect to the names and titles that are most closely related to
the statutory term investment adviser. In particular, our proposed
rule, in combination with the relationship summary, would help
distinguish between who is and who is not an investment adviser and
allow retail investors to select the business model that best suits
their financial goals. The restriction of the use of the terms
``adviser'' and ``advisor'' that we are proposing is intended to
augment protections provided to investors by applicable provisions of
the federal securities laws. Broker-dealers and their natural
associated persons can face liability for intentionally, recklessly, or
negligently misleading investors about the nature of the services they
are providing through, among other things, materially misleading
advertisements or other communications that include statements or
omissions, or deceptive practices or courses of business.\428\
---------------------------------------------------------------------------

    \428\ See, e.g., rule 10b-5 under the Securities Exchange Act
and section 17(a) of the Securities Act.
---------------------------------------------------------------------------

    We request comment generally on our proposed restriction on the use
of certain titles and in particular on the following issues:
     Given the required relationship summary, is it necessary
to impose any restrictions on the use of names or titles?
     Do you agree with our proposed restriction on the use of
``adviser'' and ``advisor''? Why or why not? To what extent does the
disclosure provided in Form CRS complement our proposed

restriction? To what extent could it be a substitute?
     Is our approach too broad or too narrow? Are there
additional terms that we should explicitly include in the rule? For
example, do any of the following names or titles have the potential to
confuse investors about the differences between investment advisers and
broker-dealers: Wealth manager; financial consultant; financial
manager; money manager; investment manager; and investment consultant?
Why or why not? What are the names or titles most commonly used that
have the potential for investor confusion? Should we consider
restricting the use of names, titles, or terms that are synonymous with
``adviser'' or ``advisor'' and if so, what would those names, titles,
or terms be?
     Do commenters believe that names or titles are a main
factor contributing to investor confusion and the potential for
investors to be misled, or are there other more significant factors?
For example, do particular services offered by broker-dealers
contribute to, or primarily cause, investor confusion and the potential
for the broker-dealer's customers to be misled into believing that the
broker-dealer is an investment adviser? If so, which services
specifically? For example, do commenters believe that retirement and
financial planning is more often associated with investment advisers
rather than broker-dealers or vice versa? Additionally, do commenters
believe that monitoring is more often associated with investment
advisers than broker-dealers or vice versa?
     Our proposed rule does not apply to financial
professionals of a broker-dealer when acting in the capacity, for
example, as an insurance broker on behalf of an insurance company or a
banker on behalf of a bank. Do you believe our proposed rule is clear
that such persons are excluded from the restriction? If not, how should
we provide such clarification?
     As discussed above, our proposed rule would not prohibit
dually registered firms from using the term ``adviser'' or ``advisor''
in their name or title. However, it would restrict the use of such
names or titles by some associated natural persons and supervised
persons of those firms, depending on whether they provide investment
advice to retail investors on behalf of the investment adviser. Do you
agree with our proposed approach? Is there investor confusion
concerning what capacity a dually registered firm, a dual hatted
financial professional, or an associated or supervised person of a
dually registered firm is acting in when communicating with a retail
investor? If such confusion exists, how should we address it, in
addition to the proposed relationship summary? For example, are retail
investors confused about which type of account their financial
professional is referring to when he or she makes a particular
recommendation? If this is a source of confusion, how should we address
it (e.g., should we address it through affirmative disclosures of
account types in account statements or another form of disclosure)?
     Given the prevalence of dually registered firms and their
associated dual hatted financial professionals, do retail investors
typically believe they are engaging a financial professional who is
solely a broker-dealer or investment adviser, or do investors
understand that such person is a dual hatted professional and therefore
may be able to engage with them as a broker-dealer and an investment
adviser? Or do retail investors currently not understand enough to
distinguish among these options in any meaningful manner?
     Do commenters believe that retail investors will
understand that there is, and will continue to be under proposed
Regulation Best Interest, differences in the standards of conduct,
compensation structures, and services offered (among other items)
depending on the capacity in which such professional engages a retail
investor?
     We are proposing to permit or restrict financial
professionals associated with dually registered firms from using the
term ``adviser'' or ``advisor'' in their name or title based on whether
they provide investment advice on behalf of such investment advisers.
Are there alternatives we should consider in implementing this portion
of the rule? For example, should we only allow a supervised person to
use such names or titles where ``a substantial part of his or her
business consists of rendering investment supervisory services'' to
retail investors, based upon a facts and circumstances determination?
\429\
---------------------------------------------------------------------------

    \429\ See section 208(c) of the Advisers Act: ``[i]t shall be
unlawful for any person registered under section 203 of this title
to represent that he is an investment counsel or to use the name
`investment counsel' as descriptive of his business unless (1) his
or its principal business consists of acting as investment adviser,
and (2) a substantial part of his or its business consists of
rendering investment supervisory services.''
---------------------------------------------------------------------------

     Our proposed rule would not prohibit dually registered
firms or dually hatted financial professionals from using ``adviser''
or ``advisor'' in their names or titles, even in circumstances where
the firm or financial professional provides only brokerage services to
a particular retail investor. Do you agree with our approach? Why or
why not? For example, should the proposed rule's application depend on
the capacity in which a financial professional engages a particular
retail investor? If so, should financial professionals use multiple
titles that would vary based on the capacity in which they are acting,
and what titles would they use? Are there compliance challenges
associated with this approach? Conversely, would this discourage dually
registered firms or dually hatted financial professionals from using
any title with ``adviser'' or ``advisor,'' even when they are providing
advisory services? Would this discourage dually hatted financial
professionals from providing brokerage services? Would a firm use
different names or titles for different subsets of their financial
professionals?
     Do you agree that the use of the terms ``adviser'' or
``advisor'' by broker-dealers are the main sources of investor
confusion? If so, what do these terms confuse investors about (e.g.,
the differences as to the standard of conduct their financial
professional owes, the duration of the relationship, fees charged,
compensation)? Are investors harmed by this confusion? If so, how? Do
you agree that ``adviser'' and ``advisor'' are often associated with
the statutory term ``investment adviser''? Do you believe that retail
investors understand what the terms ``adviser'' and ``broker-dealer''
mean and can correctly identify what type of financial professional
they have engaged?
     We understand that the terms ``adviser'' or ``advisor''
are included in some professional designations earned by financial
professionals.\430\ We also understand that particular professional
designations have been an area of concern for FINRA and NASAA.\431\
Should we include an exception to permit the use of professional
designations that use the terms ``adviser'' or ``advisor''? What
factors should the Commission consider if it were to include such an
exception? For example, should such an exception be conditioned on
prominent disclosure

that the individual is not an investment adviser or supervised by one?
---------------------------------------------------------------------------

    \430\ See FINRA, Professional Designations, available at https://www.finra.org/investors/professional-designations.
    \431\ See Senior Designations, FINRA Notice 11-52 (Nov. 2011),
available at http://www.finra.org/sites/default/files/NoticeDocument/p125092.pdf; NASAA, NASAA Model Rule on the Use of
Senior-Specific Certifications and Professional Designations (Mar.
20, 2008), available at http://www.nasaa.org/wp-content/uploads/2011/07/3-Senior_Model_Rule_Adopted.pdf.
---------------------------------------------------------------------------

     Do you agree with the proposed approach in Exchange Act
proposed rules 15l-2 and 15l-3 and Advisers Act proposed rule 211h-1 of
limiting our proposed rules to ``retail investors'' where such persons
are defined to include all natural persons as discussed above? \432\
Should we instead exclude certain categories of natural persons based
on their net worth or income level, such as accredited investors,\433\
qualified clients \434\ or qualified purchasers? \435\ If we did
exclude certain categories of natural persons based on their net worth,
what threshold should we use for measuring net worth? Should we exclude
certain categories of natural persons for other reasons?
---------------------------------------------------------------------------

    \432\ See supra notes 28-32 and accompanying text.
    \433\ See supra note 66.
    \434\ See supra note 67.
    \435\ See supra note 68.
---------------------------------------------------------------------------

     Should we conform the definition of retail investor to the
definition of retail customer as proposed in Regulation Best Interest,
which would include non-natural persons, provided the recommendation is
primarily for personal, family, or household purposes? What kind of
compliance burdens would it create to base Form CRS delivery off of a
definition of retail investor that only included recommendations
primarily for personal, family, or household purposes? Should the
definition of retail investor include trusts or similar entities that
represent natural persons, as proposed? Are there other persons or
entities that should be covered? Should we expand the definition to
cover plan participants in workplace retirement plans who receive
services from a broker-dealer or investment adviser for their
individual accounts within a plan?
     What costs would broker-dealers impacted by our proposed
rule incur as a result of having to rebrand themselves and their
financial professionals along with revising their communications? Are
there means to mitigate such costs? Would the costs differ if we made
the broker-dealer exclusion in the Advisers Act unavailable to broker-
dealers that use the terms ``adviser'' or ``advisor''?
     How would broker-dealers and associated natural persons of
broker-dealers who would be impacted by our proposed rule change the
way they market themselves or communicate with retail investors as a
result of our proposed rule? Would this cause any other changes to
their business? For example, would more broker-dealer firms also
register with the Commission or the states as investment advisers as a
result of our proposed rule? Will firms exit the brokerage business as
a result of our proposed rule? Would more associated natural persons of
broker-dealers become dual hatted?
     Would our proposed rule impact the marketing and
communications of dually registered firms and their professionals in
any manner? If so, how?
     Do investment advisers and their supervised persons also
use names, titles, or professional designations that can lead or
contribute to retail investor confusion? If so, please provide examples
of these names or titles and how they can lead or contribute to
confusion. Should we restrict investment advisers and their supervised
persons from using these names or titles?
     What costs would our proposed restriction on certain names
and titles impose? Are there greater or lower costs associated with our
proposed rules as compared to alternative approaches that consider
whether certain titles or marketing practices are consistent with
advice being ``solely incidental'' to the firm's brokerage activities
and thus permissible for a firm relying on the broker-dealer exclusion
from the Advisers Act? If so, what are the specific cost estimates of
each approach and the components of those estimates? Are there ways to
mitigate their impact and if so, what methods could be taken? Are there
operational and compliance challenges associated with our proposed
approach as compared to the alternatives approaches, and if so, what
are they?
     We request comment on the alternative approach in which a
broker-dealer would not be considered to provide investment advice
solely incidental to the conduct of its brokerage business if it uses
the term ``adviser'' or ``advisor'' to market or promote its services
and would instead treat such practices as indicating that the broker-
dealer's advisory services are not ``solely incidental'' to its conduct
of business as a broker-dealer. What would be the advantages or
disadvantages of using this approach instead of the approach we have
proposed? Would the alternative approach address and mitigate investor
confusion about the differences between broker-dealers and investment
advisers? Would the alternative approach reduce the likelihood that
investors may be misled as to the type of firm they are engaging with
and therefore make an uninformed decision? Would the alternative
approach have other effects on the analysis of when advisory activities
are or are not solely incidental to brokerage activities? How would
this alternative approach impact dually registered firms and dual
hatted financial professionals? Are there operational and compliance
challenges associated with this approach, and if so, what are they? How
would broker-dealers and associated natural persons of broker-dealers
impacted by the alternative approach change the way they market
themselves or communicate with retail investors as a result of our
proposed rule? Would this cause any other changes to their business?
     Would the alternative approach discussed above that would
preclude a broker-dealer or an associated natural person of a broker-
dealer from relying on the broker-dealer exclusion of section
202(a)(11)(C) of the Advisers Act if it ``held itself out'' as an
investment adviser address investor confusion? What would be the
advantages or disadvantages of using this approach instead of the
approach we have proposed? Which communications or level of advice do
you think imply that a broker-dealer or its associated natural person
is ``holding out'' as an investment adviser? How would an approach that
focuses on ``holding out'' as an investment adviser impact access to
advice from different kinds of firms, and how retail investors pay for
this advice? How would this approach affect competition? Would this
``holding out'' approach address any confusion that may arise from
broker-dealer marketing efforts focusing on the ongoing relationship
between the broker and the investor? Are there operational and
compliance challenges associated with this approach, and if so, what
are they?
     Instead of a prohibition or restriction on the use of
certain terms, should we permit such terms but require broker-dealers
and their associated natural persons other than dual registrants and
dual hatted financial professionals to include a disclaimer in their
communications that they are not an investment adviser or investment
adviser representative, respectively, each time they use or refer to
the term ``adviser'' or ``advisor''? Would this approach address
investor confusion or mitigate the likelihood that investors may be
misled when broker-dealers and their associated natural persons use the
term ``adviser'' or ``advisor''? Should this approach be coupled with
an affirmative obligation that a dually registered broker-dealer or its
dual hatted associated natural persons disclose that it is an
investment adviser or an investment adviser representative,
respectively, when using terms other than ``adviser'' or ``advisor''?
Would this requirement discourage broker-dealers from using

these terms even if they were not prohibited? How would this approach
impact our proposed rule requiring disclosure of the firm's regulatory
status and the financial professional's association with the firm? How
would this approach impact dually registered firms and dually hatted
financial professionals? Are there operational and compliance
challenges associated with this approach, and if so, what are they?
     We recognize that the term ``adviser'' is used differently
in connection with the regulation of investment advisory services
provided to workplace retirement plans and IRAs under ERISA and the
prohibited transaction provisions of the Internal Revenue Code. For
example, a statutory exemption for the provision of investment advice
to participants of ERISA-covered workplace retirement plans and IRAs,
and related DOL regulations, define the term ``fiduciary adviser''
broadly to include a variety of persons acting in a fiduciary capacity
in providing investment advice, including investment advisers
registered under the Advisers Act or under state laws, registered
broker-dealers, banks or similar financial institutions providing
advice through a trust department, and insurance companies, and their
affiliates, employees and other agents.\436\ Given that there are
definitions of ``adviser'' under other federal regulations that capture
entities and individuals who are not regulated under the Advisers Act,
would a restriction on the use of the term ``adviser'' that applies
only to registered broker-dealers and their registered representatives
contribute to investor confusion or result in conflicting regulations,
and possibly increased compliance burdens, or affect competition?
---------------------------------------------------------------------------

    \436\ See ERISA Sec.  408 (g)(11)(A); Code Sec.
4975(f)(8)(J)(i) and 29 CFR 2550.408g-1. In addition, under the
DOL's BIC Exemption, the term ``Adviser'' would mean an individual
who is an employee or other agent (including a registered
representative) of a state or federally registered investment
adviser, registered broker-dealer, bank or similar financial
institution, or an insurance company. See Corrected BIC Exemption,
infra note 504, section VIII(a).
---------------------------------------------------------------------------

     What would be the effect on competition by prohibiting
broker-dealers from using these terms? What would be the effect on
competition by the alternative approaches described?

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

    We are also proposing rules under the Exchange Act and the Advisers
Act to require a broker-dealer and an investment adviser registered
under section 203 to prominently disclose that it is registered as a
broker-dealer or investment adviser, as applicable, with the Commission
in print or electronic retail investor communications.\437\ We are also
proposing as part of our proposed Exchange Act rule to require an
associated natural person of a broker or dealer to prominently disclose
that he or she is an associated person of a broker-dealer registered
with the Commission in print or electronic retail investor
communications.\438\ In addition, we are proposing as part of our
Advisers Act rule to require a supervised person of an investment
adviser registered under section 203 to prominently disclose that he or
she is a supervised person of an investment adviser registered with the
Commission in print or electronic retail investor communications.\439\
For example, an investment adviser registered with the Commission would
prominently disclose the following on its print or electronic
communications: ``[Name of Firm], an investment adviser registered with
the Securities and Exchange Commission'' or ``[Name of Firm], an SEC-
registered investment adviser.'' Dually registered firms would
similarly be required to prominently disclose both registration
statuses in their print or electronic communications, for example:
``[Name of Firm], an SEC-registered broker-dealer and SEC-registered
investment adviser.'' Similarly, an associated natural person of a
broker-dealer would prominently disclose the following, for example, on
his or her business card or signature block: ``[Name of professional],
a [title] of [Name of Firm], an associated person of an SEC-registered
broker-dealer.'' Alternatively, a supervised person of an investment
adviser would prominently disclose the following on, for example, his
or her business card or signature block: ``[Name of professional], a
[title] of [Name of Firm], a supervised person of an SEC-registered
investment adviser.'' Finally, a financial professional who is both an
associated person of a broker-dealer and a supervised person of an
investment adviser would prominently disclose the following, for
example: ``[Name of professional], a [title] of [Name of Firm], an
associated person of an SEC-registered broker-dealer and a supervised
person of an SEC- registered investment adviser.''
---------------------------------------------------------------------------

    \437\ See Exchange Act proposed rule 15l-3(a) and Advisers Act
proposed rule 211h-1(a). We note that in Form ADV investment
advisers are required to state that registration with the Commission
does not imply a certain level of skill or training. See Item 1.C.
of Form ADV Part 2A. We are requesting comment on whether we should
require broker-dealers and investment advisers to include this
statement in addition to disclosing their applicable regulatory
status.
    \438\ See Exchange Act proposed rule 15l-3(b).
    \439\ See Advisers Act proposed rule 211h-1(b).
---------------------------------------------------------------------------

    Our proposed registration disclosure rules, like the proposed
restriction on names and titles, or our proposed alternative
approaches, complement our proposed requirement that broker-dealers and
investment advisers deliver a relationship summary to retail investors.
Even if a firm uses various titles, such as ``wealth consultant'' or
``wealth manager,'' the legal term for these firms is ``investment
adviser'' and/or ``broker-dealer.'' These statutory terms have meaning
because they relate to a particular regulatory framework that is
designed to address the nature and scope of the firm's activities,
which the firm would describe for a retail investor in the relationship
summary.\440\ Accordingly, we preliminarily believe that requiring a
firm to disclose whether it is a broker-dealer or an investment adviser
in print or electronic communications to retail investors would assist
retail investors to determine which type of firm is more appropriate
for their specific investment needs.
---------------------------------------------------------------------------

    \440\ For similar reasons, we are requiring the use of the terms
``supervised person'' and ``associated person'' as they are defined
legal terms generally describing the financial professional's
association with the investment adviser or broker-dealer,
respectively.
---------------------------------------------------------------------------

    For similar reasons, we preliminarily believe that because retail
investors interact with a firm primarily through financial
professionals, it is important that financial professionals disclose
the firm type with which they are associated. We acknowledge that in
the studies and the comments received, retail investors generally
believe broker-dealers and investment advisers are similar, and that
they did not understand differences between them.\441\ As discussed
above, while we acknowledge that broker-dealers and investment advisers
are similar in that they provide investment advice, they commonly are
dissimilar in a variety of key areas such as disclosure of conflicts of
interest, types of fees charged, and standard of conduct. In
particular, the

proposed relationship summary would inform retail investors about many
of these differences, and in so doing, would be addressing investor
confusion. As a result, even if investors are currently confused, over
time they should better understand that investment advisers and broker-
dealers may be different, and how they are different.
---------------------------------------------------------------------------

    \441\ See supra Section III.A. See also, e.g., RAND Study, supra
note 5, at 19, 20 (``Many [industry interview] participants reported
that they thought that offering such [fee-based account] products
and services meant that broker-dealers and investment advisers
became less distinguishable from one another. They claimed that
bundling of advice and sales by broker-dealers also added to
investor confusion . . . . [Industry Representative] interviews
suggest that individual investors do not distinguish between
investment advisers and broker-dealers. Marketplace changes that
have resulted in investment advisers and broker-dealers offering
similar services have added to investor confusion.'').
---------------------------------------------------------------------------

    Similarly, our proposed rules to require a firm to disclose whether
it is a broker-dealer or an investment adviser in print or electronic
communications to retail investors would help to facilitate investor
understanding, even if investors currently may not understand the
differences between investment advisers and broker-dealers.
    We believe that disclosures that are as important as whether a firm
is a broker-dealer or an investment adviser or whether a financial
professional is associated with a broker-dealer or is a supervised
person of an investment adviser, should not be inconspicuous or placed
in fine print. Accordingly, we are proposing to require a firm and its
financial professionals to disclose their registration statuses in
print communications in a type size at least as large as and of a font
style different from, but at least as prominent as, that used in the
majority of the communication.\442\ To be ``prominent,'' for example,
we believe the disclosures should be included, at a minimum, on the
front of a business card or in another communication, in a manner
clearly intended to draw attention to it. In addition, we are proposing
to require the disclosure to be presented in the body of the
communication and not in a footnote.\443\ If a communication is
delivered through an electronic communication or in any publication by
radio or television, the disclosure must be presented in a manner
reasonably calculated to draw retail investors' attention to it.\444\
For example, in a televised or video presentation, a voice overlay and
on-screen text could clearly convey the required information. Finally,
we propose to stage the compliance date to ensure that firms and
financial professionals can phase out certain older communications from
circulation through the regular business lifecycle rather than having
to retroactively change them.\445\
---------------------------------------------------------------------------

    \442\ See Exchange Act proposed rule 15l-3(c)(1) and Advisers
Act proposed rule 211h-1(c)(1).
    \443\ See supra note 442.
    \444\ See Exchange Act proposed rule 15l-3(c)(2) and Advisers
Act proposed rule 211h-1(c)(2). See also Proposed Amendments to
Investment Company Advertising Rules, Investment Company Act Release
No. 25575 (May 17, 2002); Amendments to Investment Company
Advertising Rules, Investment Company Act Release No. 26195 (Sept.
29, 2003) (stating that ``radio and television advertisements [must]
give the required narrative disclosures emphasis equal to that used
in the major portion of the advertisement''). See also 17 CFR
230.420.
    \445\ Similarly, we are not requiring firms to send new
communications to replace all older print communications as this
would be overly burdensome and costly for firms.
---------------------------------------------------------------------------

    We request comment generally on our proposed requirement to
disclose a firm's regulatory status and, for financial professionals,
their association with such firm, and in particular on the following
issues:
     Does our proposed rule requiring disclosure of a firm's
registration status, either alone or in combination with the proposed
relationship summary, sufficiently address the concerns addressed by
our proposed restriction on certain names or titles? If not, why not?
     Would the proposed rules requiring disclosure of
registration status and the financial professional's association with
the firm give retail investors greater clarity about various aspects of
their relationship with a financial professional (e.g., his or her
services, compensation structures, conflicts of interest, and legal
obligations)?
     To what extent do firms already clearly and conspicuously
disclose their federal and/or state registration as investment advisers
or broker-dealers? To what extent do financial professionals already
disclose their association with the broker-dealer or investment
adviser? If such status is disclosed, is it typically in fine print or
presented in a manner that it is not easily recognizable to investors?
     Do retail investors understand what it means for a firm to
be ``registered'' with the Commission or a state? Additionally, do
retail investors understand what it means for a financial professional
to be an ``associated person'' of a broker-dealer or a ``supervised
person'' of an investment adviser?
     Would our proposed rules improve clarity and consistency
for investors in identifying a firm's regulatory status and a financial
professional's association with a firm or will it lead to unnecessary,
wordy, and possibly redundant disclosure? If the latter, how can we
address this?
     Are we correct that investors would find it helpful to
know whether a firm is registered as an investment adviser or a broker-
dealer or a financial professional is associated with a broker-dealer
or supervised by an investment adviser so that they can refer to the
relationship summary to better understand the practical implications of
the firm's registration and such financial professional's association
with that firm?
     Should dually registered firms be required to disclose
both registration statuses? Would this requirement cause more confusion
or help to address it? If so, how? By requiring a financial
professional to disclose whether he or she is an associated person of a
broker-dealer or a supervised person of an investment adviser, would we
be assisting retail investors in understanding the capacity in which
their financial professional services them? For example, would retail
investors serviced by dual hatted financial professionals understand
that their financial professional may act in dual capacities (i.e.,
brokerage and advisory)?
     Are our proposed requirements prescribing the presentation
of the disclosure appropriate? Should we consider removing any of these
requirements? Alternatively, are there requirements we should add? If
so, which requirements and why? Are there requirements that we should
modify? For example, could the Commission's objective of ensuring
prominence of disclosure be served through a more principles-based
approach, or through different requirements (e.g., that the disclosure
be not 20% smaller than the principal text)?
     Should the account statement or other disclosure clarify
whether a retail investor has an advisory or a brokerage account? If
so, how?
     Should our proposed rules define ``communication''? For
example, should we include in the rule a definition that tracks FINRA's
definition of ``communication'' in Rule 2210? In particular, FINRA Rule
2210 defines a ``communication'' as correspondence, retail
communications and institutional communications. ``Correspondence''
means any written (including electronic) communication that is
distributed or made available to 25 or fewer retail investors within
any 30 calendar day period and ``Retail communication'' means any
written (including electronic) communication that is distributed or
made available to more than 25 retail investors within any 30 calendar
day period. Finally, ``Institutional communication'' means any written
(including electronic) communication that is distributed or made
available only to institutional investors, but does not include a
member's internal communications. Are there other definitions of
``communication'' we should consider? As an alternative to the word

``communication'' in our proposed rules, should we use
``advertisements'' as defined in rule 206(4)-1 under the Advisers Act,
or a different term? \446\
---------------------------------------------------------------------------

    \446\ See FINRA Rule 2210(a); rule 206(4)-1 under the Advisers
Act.
---------------------------------------------------------------------------

     Should the proposed rules apply to all communications to
retail investors, including oral communications? On the other hand, are
there certain types of written communications that could be exempted,
e.g. communications that do not make any financial or investment
recommendation or otherwise promote a product or service of the member?
\447\
---------------------------------------------------------------------------

    \447\ See FINRA Rule 2210(b)(1)(D)(iii) (exempting certain
communications from principal pre-approval).
---------------------------------------------------------------------------

     Should we permit the use of hyperlinks to the registration
status disclosure statement for electronic communications rather than
requiring the disclosure statement on the communication itself? Would
permitting hyperlinks limit or promote the effectiveness of this
disclosure requirement, and if so, how?
     Should we require broker-dealers, investment advisers and
financial professionals to state that registration with the Commission
does not imply a certain level of skill or training? Are there
potential benefits or drawbacks to requiring this type of statement?

IV. Economic Analysis

    We are sensitive to the economic effects, including the costs and
benefits that stem from the proposed rules. Whenever the Commission
engages in rulemaking and is required to consider or determine whether
an action is necessary or appropriate in the public interest, section
3(f) of the Exchange Act requires the Commission to consider whether
the action would promote efficiency, competition, and capital
formation, in addition to the protection of investors.\448\ Further,
when making rules under the Exchange Act, section 23(a)(2) of the
Exchange Act requires the Commission to consider the impact such rules
would have on competition.\449\ Section 23(a)(2) of the Exchange Act
also prohibits the Commission from adopting any rule that would impose
a burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.\450\
---------------------------------------------------------------------------

    \448\ See 15 U.S.C. 77b(b) and 15 U.S.C. 78c(f).
    \449\ See 15 U.S.C. 78w(a)(2).
    \450\ Id.
---------------------------------------------------------------------------

    Section 202(c) of the Advisers Act requires the Commission, when
engaging in rulemaking and required to consider or determine whether an
action is necessary or appropriate in the public interest, also to
consider whether the action will promote efficiency, competition, and
capital formation, in addition to the protection of investors.\451\ The
Commission provides both a qualitative assessment of the potential
effects and, where feasible, quantitative estimates of the potential
aggregate initial and aggregate ongoing costs. In some cases, however,
quantification is particularly challenging due to the difficulty of
predicting how market participants would act under the conditions of
the proposed rules. For example, although we expect that the proposal
would increase retail investors' understanding of the services provided
to them, investors could respond differently to the increased
understanding--by transferring to a different financial firm or
professional, hiring a financial professional for the first time, or
entirely abandoning the financial services market while moving their
assets to other products or markets (e.g., bank deposits or insurance
products). The Commission encourages commenters to provide any data and
information that could help us quantify these long-term effects.
---------------------------------------------------------------------------

    \451\ 15 U.S.C. 80b-2(c).
---------------------------------------------------------------------------

    In the economic analysis that follows, we first examine the current
regulatory and economic landscape to form a baseline for our analysis.
We then analyze the likely economic effects--including benefits and
costs and impact on efficiency, competition, and capital formation--
arising from the proposed rules relative to the baseline discussed
below.

A. Baseline

    This section discusses, as it relates to this proposal, the current
state of the broker-dealer and investment adviser markets, the current
regulatory environment, and the current state of retail investor
perceptions in the market.
1. Providers of Financial Services
a. Broker-Dealers
    As noted above, one market that would be affected by these proposed
rules \452\ is the market for broker-dealer services, including firms
that are dually registered as broker-dealers and investment
advisers.\453\ The market for broker-dealer services encompasses a
small set of large broker-dealers and thousands of small broker-dealers
competing for niche or regional segments of the market.\454\
---------------------------------------------------------------------------

    \452\ ``Proposed rules'' used in this economic analysis is
inclusive of Form CRS and related proposed forms as well as the
proposed rules themselves.
    \453\ Not all firms that are dually registered as an investment
adviser and a broker-dealer offer both brokerage and advisory
accounts to retail investors--for example, some dual registrants
offer advisory accounts to retail investors but offer only brokerage
services, such as underwriting services, to institutional clients.
For purposes of the discussion of the baseline in this economic
analysis, a dual registrant is any firm that is dually registered
with the Commission as an investment adviser and a broker-dealer.
For the purposes of the relationship summary, however, we propose to
define dual registrant as a firm that is dually registered as a
broker-dealer and an investment adviser and offers services to
retail investors as both a broker-dealer and investment adviser. See
supra note 25.
    \454\ See Risk Management Controls for Brokers or Dealers with
Market Access, Securities Exchange Act Release No. 63241 (Nov. 3,
2010) [75 FR 69791, 69822 (Nov. 15, 2010)].
---------------------------------------------------------------------------

    As of December 2017, there were approximately 3,841 registered
broker-dealers with over 130 million customer accounts. In total, these
broker-dealers have close to $4 trillion in total assets.\455\ More
than two-thirds of all brokerage assets and close to one-third of all
customer accounts are held by the 16 largest broker-dealers, as shown
in Table 1, Panel A.\456\ Of the broker-dealers registered with the
Commission as of December 2017, 366 broker-dealers were dually
registered as investment advisers; \457\ however, these firms hold
nearly 90 million (68%) customer accounts.\458\ Approximately 546
broker-

dealers (14%) reported at least one type of non-securities business,
including insurance, retirement planning, mergers & acquisitions, and
real estate, among others.\459\ Approximately 74% of registered broker-
dealers report retail customer activity.\460\
---------------------------------------------------------------------------

    \455\ Assets are estimated by Total Assets (allowable and non-
allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II,
available at https://www.sec.gov/files/formx-17a-5_2.pdf) and
correspond to balance sheet total assets for the broker-dealer. The
Commission does not have an estimate of the total amount of customer
assets for broker-dealers. We estimate broker-dealer size from the
total balance sheet assets as described above.
    \456\ Approximately $3.91 trillion of total assets of broker-
dealers (98%) are at firms with total assets in excess of $1
billion. Of the 30 dual registrants in the group of broker-dealers
with total assets in excess of $1 billion, total assets for these
dual registrants are $2.46 trillion (62%) of aggregate broker-dealer
assets. Of the remaining 88 firms, 81 have affiliated investment
advisers.
    \457\ Because this number does not include the number of broker-
dealers who are also registered as state investment advisers, the
number undercounts the full number of broker-dealers that operate in
both capacities. Further, not all firms that are dually registered
as an investment adviser and a broker-dealer offer both brokerage
and advisory accounts to retail investors--for example, some dual
registrants offer advisory accounts to retail investors but offer
only brokerage services, such as underwriting services, to
institutional customers. For purposes of the discussion of the
baseline in this economic analysis, a dual registrant is any firm
that is dually registered with the Commission as an investment
adviser and a broker-dealer.
    \458\ Some broker-dealers may be affiliated with investment
advisers without being dually registered. From Question 10 on Form
BD, 2,145 broker-dealers report that directly or indirectly, they
either control, are controlled by, or under common control with an
entity that is engaged in the securities or investment advisory
business. Comparatively, 2,478 (19.57%) SEC-registered investment
advisers report an affiliate that is a broker-dealer in Section 7A
of Schedule D of Form ADV, including 1,916 SEC-registered investment
advisers that report an affiliate that is a registered broker-
dealer. Approximately 75% of total assets under management of
investment advisers are managed by these 2,478 investment advisers.
    \459\ We examined Form BD filings to identify broker-dealers
reporting non-securities business. For the 546 broker-dealers
reporting such business, staff analyzed the narrative descriptions
of these businesses on Form BD, and identified the most common types
of businesses: Insurance (208), management/financial/other
consulting (101), advisory/retirement planning (80), mergers &
acquisitions (71), foreign exchange/swaps/other derivatives (31),
real estate/property management (31), tax services (15), and other
(141). Note that a broker-dealer may have more than one line of non-
securities business.
    \460\ The value of customer accounts is not available from FOCUS
data for broker-dealers. Therefore, to obtain estimates of firm size
for broker-dealers, we rely on the value of broker-dealers total
assets as obtained from FOCUS reports. Retail sales activity is
identified from Form BR, which categorizes retail activity broadly
(by marking the ``sales'' box) or narrowly (by marking the
``retail'' or ``institutional'' boxes as types of sales activity).
We use the broad definition of sales as we preliminarily believe
that many firms will just mark ``sales'' if they have both retail
and institutional activity. However, we note that this may capture
some broker-dealers that do not have retail activity, although we
are unable to estimate that frequency. We request comment on whether
firms that intermediate both retail and institutional customer
activity generally market only ``sales'' on Form BR.
---------------------------------------------------------------------------

    Panel B of Table 1 limits the broker-dealers to those that report
some retail investor activity. As of December 2017, there were
approximately 2,857 broker-dealers that served retail investors, with
over $3.6 trillion in assets (90% of total broker-dealer assets) and
128 million (96%) customer accounts.\461\ Of those broker-dealers
serving retail investors, 360 are dually registered as investment
advisers.\462\
---------------------------------------------------------------------------

    \461\ Total assets and customer accounts for broker-dealers that
serve retail customers also include institutional accounts. Data
available from Form BD and FOCUS data is not sufficiently granular
to identify the percentage of retail and institutional accounts at
firms.
    \462\ Of the 36 dual registrants in the group of retail broker-
dealers with total assets in excess of $500 million, total assets
for these dual registrants are $2.19 trillion (60%) of aggregate
retail broker-dealer assets. Of the remaining 72 retail broker-
dealers, 67 have affiliated investment advisers.
    \463\ The data is obtained from FOCUS filings as of December
2017. Note that there may be a double-counting of customer accounts
among in particular the larger broker-dealers as they may report
introducing broker-dealer accounts as well in their role as clearing
broker-dealers.
    \464\ In addition to the approximately 130 million individual
accounts at broker-dealers, there are approximately 293,000 omnibus
accounts (0.2% of total accounts at broker-dealers), across all
3,841 broker-dealers, of which approximately 99% are held at broker-
dealers with greater than $1 billion in total assets. See also supra
note 455. Omnibus accounts reported in FOCUS data are the accounts
of non-carrying broker-dealers with carrying broker-dealers. These
accounts may have securities of multiple customers (of the non-
carrying firm), or securities that are proprietary assets of the
non-carrying broker-dealer. We are unaware from the data available
to determine how many customer accounts non-carrying broker-dealers
may have. The data does not allow the Commission to parse the total
assets in those accounts to determine to whom such assets belong.
Therefore, our estimate may be underinclusive of all customer
accounts held at broker-dealers.
    \465\ Customer Accounts includes both broker-dealer and
investment adviser accounts for dual registrants.

                      Table 1--Panel A: Registered Broker-Dealers as of December 2017 \463\
                       [Cumulative Broker-Dealer Total Assets and Customer Accounts \464\]
----------------------------------------------------------------------------------------------------------------
                                                                                Cumulative
                                                   Total number      Number of      Cumulative       number of
      Size of broker-dealer  (total assets)           of BDs           dual-       total assets      customer
                                                                  registered BDs                  Accounts \465\
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................              16              10     $2,717 bil.      40,969,187
$1 billion to $50 billion.......................             102              20      1,196 bil.      81,611,933
$500 million to $1 billion......................              38               7         26 bil.       4,599,330
$100 million to $500 million....................             118              26         26 bil.       1,957,981
$10 million to $100 million.....................             482              94         17 bil.       2,970,133
$1 million to $10 million.......................           1,035             141          4 bil.         233,946
<$1 million.....................................           2,055              68          1 bil.           5,588
                                                 ---------------------------------------------------------------
    Total.......................................           3,841             366      3,987 bil.     132,348,098
----------------------------------------------------------------------------------------------------------------

                     Table 1--Panel B: Registered Retail Broker-Dealers as of December 2017
                          [Cumulative Broker-Dealer Total Assets and Customer Accounts]
----------------------------------------------------------------------------------------------------------------
                                                                                Cumulative
                                                   Total number      Number of      Cumulative       number of
      Size of broker-dealer  (total assets)           of BDs           dual-       total assets      customer
                                                                  registered BDs                     accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................              15              10     $2,647 bil.      40,964,945
$1 billion to $50 billion.......................              70              19        923 bil.      77,667,615
$500 million to $1 billion......................              23               7         16 bil.       4,547,574
$100 million to $500 million....................              93              25         20 bil.       1,957,981
$10 million to $100 million.....................             372              94         14 bil.       2,566,203
$1 million to $10 million.......................             815             139          3 bil.         216,158
<$1 million.....................................           1,469              66        $.4 bil.           5,588
                                                 ---------------------------------------------------------------
    Total.......................................           2,857             360     $3,624 bil.     127,926,064
----------------------------------------------------------------------------------------------------------------

    Table 2 reports information on brokerage commissions,\466\ fees,
and selling concessions from the fourth quarter of 2017 for all broker-
dealers, including dual registrants.\467\ On average, broker-dealers,
including those that are dually registered as investment advisers, earn
about $2.1 million per quarter in revenue from commissions and more
than double that amount in fees,\468\ although the Commission notes
that fees encompass a variety of fees, not just those related to
advisory services.\469\ The level of revenues earned from broker-
dealers for commissions and fees increases with broker-dealer size, but
also tends to be more heavily weighted towards commissions for broker-
dealers with less than $10 million in assets and is weighted more
heavily towards fees for broker-dealers with assets in excess of $10
million. For example, for the 102 broker-dealers with assets between $1
billion and $50 billion, average revenues from commissions are $25
million, while average revenues from fees are approximately $91
million.\470\
---------------------------------------------------------------------------

    \466\ FOCUS data does not provide mark-ups or mark-downs as a
separate revenue category and they are not included as part of the
brokerage commission revenue.
    \467\ Source: FOCUS data.
    \468\ Fees, as detailed in the FOCUS data, include fees for
account supervision, investment advisory and administrative
services. Beyond the broad classifications of fee types included in
fee revenue, we are unable to determine whether fees such as 12b-1
fees, sub-accounting, or other such service fees are included. The
data covers both broker-dealers and dually-registered firms. FINRA's
Supplemental Statement of Income, Line 13975 (Account Supervision
and Investment Advisory Services) denotes that fees earned for
account supervision are those fees charged by the firm for providing
investment advisory services where there is no fee charged for trade
execution. Investment Advisory Services generally encompass
investment advisory work and execution of client transactions, such
as wrap arrangements. These fees also include fees charged by
broker-dealers that are also registered with the Commodity Futures
Trading Commission (``CFTC''), but do not include fees earned from
affiliated entities (Item A of question 9 under Revenue in the
Supplemental Statement of Income).
    \469\ With respect to the FOCUS data, additional granularity of
what services comprise ``advisory services'' is not available.
    \470\ A rough estimate of total fees in this size category would
be 102 broker-dealers with assets between $1 billion and $50 billion
multiplied by the average fee revenue of $91 million, or $9.381
billion in total fees. Divided by the number of customer accounts in
this size category (81,611,933), the average account would be
charged approximately $115 in fees per quarter, or $460 per year.
---------------------------------------------------------------------------

    In addition to revenue generated from commissions and fees, broker-
dealers may also receive revenues from other sources, including margin
interest, underwriting, research services, and third-party selling
concessions, such as from sales of investment company (``IC'') shares.
As shown in Table 2, Panel A, these selling concessions are generally a
smaller fraction of broker-dealer revenues than either commissions or
fees, except for broker-dealers with total assets between $10 million
and $100 million. For these broker-dealers, revenue from third-party
selling concessions is the largest category of revenues and constitutes
approximately 44% of total revenues earned by these firms.
    Table 2, Panel B, below provides aggregate revenues by revenue type
(commissions, fees, or selling concessions) for broker-dealers
delineated by whether the broker-dealer is also a dual registrant.
Broker-dealers dually registered as investment advisers have a
significantly larger fraction of their revenues from fees compared to
commissions or selling concessions, whereas broker-dealers that are not
dually registered generated approximately 43% of their advice-related
revenues as commissions and only 32% of their advice-related revenues
from fees, although we lack granularity to determine whether advisory
services, in addition to supervision and administrative services,
contribute to fees at standalone broker-dealers.

            Table 2--Panel A: Average Broker-Dealer Revenues From Revenue Generating Activities \471\
----------------------------------------------------------------------------------------------------------------
                                                                                Sales of  IC
      Size of broker-dealer in total assets              N          Commissions     Fees \472\        shares
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................              16    $176,193,599    $365,014,954     $20,493,769
$1 billion-$50 billion..........................             102      25,109,619      91,966,559      18,808,687
$500 million-$1 billion.........................              38       6,322,803      11,312,112       6,724,401
$100 million-$500 million.......................             118       7,698,889      11,338,175       4,536,407
$10 million-$100 million........................             483       1,801,079       2,811,290       3,653,475
$1 million-$10 million..........................           1,035         633,720         372,757         217,444
<$1 million.....................................           2,049          66,503          38,618          26,270
                                                 ---------------------------------------------------------------
    Average of All Broker-Dealers...............           3,841       2,132,544       4,897,521       1,322,759
----------------------------------------------------------------------------------------------------------------

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

    \471\ The data obtained from December 2017 FOCUS reports and
averaged across size groups.
    \472\ Fees, as detailed in the FOCUS data, include fees for
account supervision, investment advisory and administrative
services. The data covers both broker-dealers and dually-registered
firms.
---------------------------------------------------------------------------

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

    \473\ See id.

 Table 2--Panel B: Aggregate Total Revenues From Revenue Generating Activities for Broker-Dealers Based on Dual
                                                Registrant Status
----------------------------------------------------------------------------------------------------------------
                                                                                Sales of IC
               Broker-dealer type                        N          Commissions     Fees \473\        shares
----------------------------------------------------------------------------------------------------------------
Dual Registered as IAs..........................             366      $4.27 bil.     $15.88 bil.       $2.8 bil.
Standalone Registered BDs.......................           3,475       3.92 bil.       2.93 bil.       2.28 bil.
                                                 ---------------------------------------------------------------
    All.........................................           3,841       8.19 bil.      18.81 bil.       5.08 bil.
----------------------------------------------------------------------------------------------------------------

i. Disclosures for Broker-Dealers
    Broker-dealers register with and report information to the
Commission, the SROs, and other jurisdictions through Form BD. Form BD
requires information about the background of the applicant, its
principals, controlling persons, and employees, as well as information
about the type of business the broker-dealer proposes to engage in and
all control affiliates engaged in the securities or investment advisory
business.\474\ Broker-dealers report whether a broker-dealer or any of
its control affiliates have been subject to criminal prosecutions,
regulatory actions, or civil actions in connection with any investment-
related activity, as well as certain financial matters.\475\ Once a
broker-dealer is registered, it must keep its Form BD current by
amending it promptly when the information is or becomes inaccurate for
any reason.\476\ In addition, firms report similar information and
additional information to FINRA pursuant to FINRA Rule 4530.\477\ The
current Paperwork Reduction Act estimate for the total industry-wide
annual filing burden to comply with rule 15b1-1 and file Form BD is
approximately 4,999 hours, with an estimated internal cost of
compliance associated with those burden hours for all broker-dealers of
$1,394,721.
---------------------------------------------------------------------------

    \474\ See generally Form BD.
    \475\ See Item 11 and Disclosure Reporting Pages, Form BD.
    \476\ See Exchange Act rule 15b3-1(a).
    \477\ See supra Section II.B.7.
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    A significant amount of information concerning broker-dealers and
their associated natural persons, including information from Form BD,
Form BDW, and Forms U4, U5, and U6, is publicly available through
FINRA's BrokerCheck system. This information includes violations of and
claims of violations of the securities and other financial laws by
broker-dealers and their financial professionals; criminal or civil
litigation, regulatory actions, arbitration, or customer complaints
against broker-dealers and their financial professionals; and the
employment history and licensing information of financial professionals
associated with broker-dealers, among other things.\478\
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    \478\ FINRA Rule 8312 governs the information FINRA releases to
the public via BrokerCheck. See supra note 280 and accompanying
text.
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    Broker-dealers are subject to other disclosure requirements under
the federal securities laws and SRO rules. For instance, under existing
antifraud provisions of the Exchange Act, a broker-dealer has a duty to
disclose material information to its customers conditional on the scope
of the relationship with the customer.\479\ Disclosure has also been a
feature of other regulatory efforts related to financial services,
including those of DOL and certain FINRA rules.\480\
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    \479\ A broker-dealer also may be liable if it does not disclose
``material adverse facts of which it is aware''. See, e.g., Chasins
v. Smith, Barney & Co., 438 F.2d at 1172; SEC v. Hasho, 784 F. Supp.
at 1110; Release 48758, supra note 243 (``When a securities dealer
recommends stock to a customer, it is not only obligated to avoid
affirmative misstatements, but also must disclose material adverse
facts of which it is aware. That includes disclosure of ``adverse
interests'' such as ``economic self-interest'' that could have
influenced its recommendation.'') (citations omitted).
    \480\ See, infra Section IV.A.1.c; FINRA Notice 10-54, supra
note 12. Generally, all registered broker-dealers that deal with the
public must become members of FINRA, a registered national
securities association, and may choose to become exchange members.
See Exchange Act section 15(b)(8) and Exchange Act rule 15b9-1.
FINRA is the sole national securities association registered with
the SEC under section 15A of the Exchange Act. Accordingly, for
purposes of discussing a broker-dealer's regulatory requirements
when providing advice, we focus on FINRA's regulation, examination
and enforcement with respect to member broker-dealers. FINRA
disclosure rules include but are not limited FINRA rules 2210(d)(2)
(communications with the public), 2260 (disclosures), 2230 (customer
account statements and confirmations), and 2270 (day-trading risk
disclosure statement).
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b. Investment Advisers
    Other parties that would be affected by the proposed rules and
proposed Form CRS are SEC-registered investment advisers.\481\ This
section first discusses SEC-registered investment advisers, followed by
a discussion of state-registered investment advisers.
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    \481\ In addition to SEC-registered investment advisers, which
are the focus of this section, the proposed rules and proposed Form
CRS could also affect banks, trusts, insurance companies, and other
providers of financial advice.
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    As of December 2017, there are approximately 12,700 investment
advisers registered with the Commission. The majority of SEC-registered
investment advisers report that they provide portfolio management
services for individuals and small businesses.\482\
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    \482\ Of the approximately 12,700 SEC-registered investment
advisers, 7,979 (64%) report in Item 5.G.(2) of Form ADV that they
provide portfolio management services for individuals and/or small
businesses. In addition, there are approximately 17,800 state-
registered investment advisers, of which 145 are also registered
with the Commission. Approximately 13,800 state-registered
investment advisers are retail facing (see Item 5.D of Form ADV).
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    Of all SEC-registered investment advisers, 366 identified
themselves as dually registered broker-dealers.\483\ Further, 2,478
investment advisers (20%) reported an affiliate that is a broker-
dealer, including 1,916 investment advisers (15%) that reported an SEC-
registered broker-dealer affiliate.\484\ As shown in Panel A of Table 3
below, in aggregate, investment advisers have over $72 trillion in
assets under management (``AUM''). A substantial percentage of AUM at
investment advisers is held by institutional clients, such as
investment companies, pooled investment vehicles, and pension or profit
sharing plans; therefore, although the dollar value of AUM for
investment advisers and of customer assets in broker-dealer accounts is
comparable, the total number of accounts for investment advisers is
only 27% of the number of customer accounts for broker-dealers.
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    \483\ See supra note 457.
    \484\ Item 7.A.1 of Form ADV.
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    Based on staff analysis of Form ADV data, approximately 60% of
investment advisers (7,600) have some portion of their business
dedicated to retail investors, including both high net worth and non-
high net worth individual clients, as shown in Panel B of Table 3.\485\
In total, these firms have approximately $32 trillion of assets under
management.\486\ Approximately 6,600 registered investment advisers
(52%) serve 29 million non-high net worth individual clients and have
approximately $5.33 trillion in assets under management, while nearly
7,400 registered investment advisers (58%) serve approximately 4.8
million high net worth individual clients with $6.56 trillion in assets
under management.\487\
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    \485\ We use the responses to Items 5.D.(a)(1), 5.D.(a)(3),
5.D.(b)(1), and 5.D.(b)(3) of Part 1A. If at least one of these
responses was filled out as greater than 0, the firm is considered
as providing business to retail investors. Form ADV Part 1A.
    \486\ The aggregate AUM reported for these investment advisers
that have retail investors includes both retail AUM as well as any
institutional AUM also held at these advisers.
    \487\ Estimates are based on IARD system data as of December 31,
2017. The AUM reported here is specifically that of those non-high
net worth clients. Of the 7,600 investment advisers serving retail
investors, 360 may also be dually registered as broker-dealers.

                   Table 3--Panel A: Registered Investment Advisers (RIAs) as of December 2017
                           [Cumulative RIA assets under management (AUM) and accounts]
----------------------------------------------------------------------------------------------------------------
                                                                  Number of dual-                   Cumulative
        Size of investment adviser  (AUM)         Number of RIAs    registered    Cumulative AUM     number of
                                                                       RIAs                          accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................             246              15    $48,221 bil.      17,392,968
$1 billion to $50 billion.......................           3,238             115     21,766 bil.      11,560,805
$500 million to $1 billion......................           1,554              53      1,090 bil.       2,678,084
$100 million to $500 million....................           5,568             129      1,303 bil.       3,942,639
$10 million to $100 million.....................           1,103              24         59 bil.         198,659
$1 million to $10 million.......................             172               2          1 bil.           5,852
<$1 million.....................................             778              28        .02 bil.          31,291
                                                 ---------------------------------------------------------------
    Total.......................................          12,659             366     72,439 bil.      35,810,298
----------------------------------------------------------------------------------------------------------------

               Table 3--Panel B: Retail Registered Investment Advisers (RIAs) as of December 2017
                           [Cumulative RIA assets under management (AUM) and accounts]
----------------------------------------------------------------------------------------------------------------
                                                                     Number of
                                                                       dual-                        Cumulative
        Size of investment adviser  (AUM)         Number of RIAs    registered    Cumulative AUM     number of
                                                                       RIAs                          accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................             106              15    $22,788 bil.      16,638,548
$1 billion to $50 billion.......................           1,427             114      8,472 bil.      10,822,275
$500 million to $1 billion......................             934              52        652 bil.       2,602,220
$100 million to $500 million....................           4,114             126        917 bil.       3,814,900
$10 million to $100 million.....................             711              24         40 bil.         231,663
$1 million to $10 million.......................              98               1         .4 bil.           5,804
<$1 million.....................................             198              29        .02 bil.          31,271
                                                 ---------------------------------------------------------------
    Total.......................................           7,588             361     32,870 bil.      34,146,681
----------------------------------------------------------------------------------------------------------------

    As an alternative to registering with the Commission, smaller
investment advisers could register with state regulators.\488\ As of
December 2017, there are 17,635 state registered investment
advisers,\489\ of which 145 are also registered with the Commission. Of
the state-registered investment advisers, 236 are dually registered as
broker-dealers, while 5% (920) report a broker-dealer affiliate. In
aggregate, state-registered investment advisers have approximately $341
billion in AUM. Eighty-two percent of state-registered investment
advisers report that they provide portfolio management services for
individuals and small businesses, compared to just 64% for SEC-
registered investment advisers.
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    \488\ Pursuant to the Dodd-Frank Act, Item 2.A. of Part 1A of
Form ADV requires an investment adviser to register with the SEC if
it (i) is a large adviser that has $100 million or more of
regulatory assets under management (or $90 million or more if an
adviser is filing its most recent annual updating amendment and is
already registered with the SEC); (ii) is a mid-sized adviser that
does not meet the criteria for state registration or is not subject
to examination; (iii) meets the requirements for one or more of the
revised exemptive rules under section 203A discussed below; (iv) is
an adviser (or subadviser) to a registered investment company; (v)
is an adviser to a business development company and has at least $25
million of regulatory assets under management; or (vi) received an
order permitting the adviser to register with the Commission.
Although the statutory threshold is $100 million, the SEC raised the
threshold to $110 million for those investment advisers that do not
already file with the SEC.
    \489\ There are 79 investment advisers with latest reported
Regulatory Assets Under Management in excess of $110 million but are
not listed as registered with the SEC. For the purposes of this
rulemaking, these are considered erroneous submissions.
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    Approximately 77% of state-registered investment advisers (13,470)
have some portion of their business dedicated to retail investors,\490\
and in aggregate, these firms have approximately $308 billion in
AUM.\491\ Approximately 12,700 (72%) state-registered advisers serve
616,000 non-high net worth retail clients and have approximately $125
billion in AUM, while over 11,000 (63%) state-registered advisers serve
approximately 194,000 high net worth retail clients with $138 billion
in AUM.\492\
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    \490\ We use the responses to Items 5.D.(a)(1), 5.D.(a)(3),
5.D.(b)(1), and 5.D.(b)(3) of Part 1A. If at least one of these
responses was filled out as greater than 0, the firm is considered
as providing business to retail investors. Form ADV Part 1A.
    \491\ The aggregate AUM reported for these investment advisers
that have retail investors includes both retail AUM as well as any
institutional AUM also held at these advisers.
    \492\ Estimates are based on IARD system data as of December 31,
2017. The AUM reported here is specifically that of those non-high
net worth investors. Of the 13,471 investment advisers serving
retail investors, 144 may also be dually registered as broker-
dealers.
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    Table 4 details the compensation structures employed by
approximately 12,700 investment advisers. Approximately 95% are
compensated through a fee-based arrangement, where a percentage of
assets under management are remitted to the investment adviser from the
investor for advisory services. As shown in the table below, most
investment advisers rely on a combination of different compensation
types, beyond fee-based compensation, including fixed fees, hourly
charges, and performance based fees. Less than 4% of investment
advisers charge commissions \493\ to their investors.
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    \493\ Some investment advisers report on Item 5.E. of Form ADV
that they receive ``commissions.'' As a form of deferred sales load,
all payments of ongoing sales charges to intermediaries would
constitute transaction-related compensation. Intermediaries