assessing the costs and burdens relating to disclosure of type and
scope of services, as reflected in this section.
    \1421\ This estimate is based on the following calculation: (7
burden hours per dually registered firm per year) x (563 dually
registered broker-dealers) = 3,941 ongoing aggregate burden hours
per year.
---------------------------------------------------------------------------

    With respect to small broker-dealers, we estimate an internal
burden of two hours for in-house compliance and business-line personnel
to review and update changes in types or scope of services, and another
two burden hours annually for in-house counsel to amend the account
disclosure to disclose material changes to type and scope of services--
for a total of four burden hours. The estimated ongoing aggregate
burden for small broker-dealers to amend account disclosures to reflect
changes in type and scope of services is therefore 3,024 hours per
year.\1422\
---------------------------------------------------------------------------

    \1422\ This estimate is based on the following calculation: (4
burden hours per broker-dealer per year) x (756 small broker-
dealers) = 3,024 ongoing aggregate burden hours per year.
---------------------------------------------------------------------------

    We estimate that large broker-dealers would incur ten burden hours
annually for in-house compliance and business-line personnel to review
and update changes the type and scope of services, and another ten
burden hours annually for in-house counsel to amend the account
disclosure to disclose material changes to the type and scope of
services, for a total of twenty burden hours. We therefore believe the
ongoing, aggregate burden is 40,200 hours per year for large broker-
dealers.\1423\
---------------------------------------------------------------------------

    \1423\ This estimate is based on the following calculation: (20
burden hours per broker-dealer per year) x (2,010 large broker-
dealers) = 40,200 ongoing aggregate burden hours per year.
---------------------------------------------------------------------------

    With respect to delivery of the amended account agreements in the
event of material changes to the capacity disclosure or disclosure
related to type and scope of services, we estimate that this would take
place among 20% of a broker-dealer's retail customer accounts annually.
We therefore estimate broker-dealers to incur a total annual aggregate
burden of 408,000 hours, or 148 hours per year per broker-dealer.\1424\
---------------------------------------------------------------------------

    \1424\ (20%) x (102 million retail customer accounts) x (.02
hours for delivery to each customer account) = 408,000 aggregate
burden hours. Conversely, 408,000 aggregate burden hours/2,766
broker-dealers = 148 burden hours per year per broker-dealer.
---------------------------------------------------------------------------

    The total ongoing aggregate burden for all broker-dealers to
review, amend, and deliver updated account disclosures to reflect
changes in capacity, type and scope of services would be 455,165 burden
hours per year.\1425\
---------------------------------------------------------------------------

    \1425\ This estimate is based on the following calculation:
(3,941 ongoing aggregate burden hours for dually registered broker-
dealers) + (3,024 ongoing aggregate burden hours for small broker-
dealers) + (40,200 ongoing aggregate burden hours for large broker-
dealers) + (408,000 ongoing aggregate burden hours for delivery of
amended account disclosures) = 455,165 total ongoing aggregate
burden hours per year.
---------------------------------------------------------------------------

    The Commission acknowledges that the types of services and product
offerings vary greatly by broker-dealer, and therefore the costs and
burdens associated with updating the account disclosure might also
vary.
(2) Disclosure of Fees and Costs
    The Commission assumes for purposes of this analysis that a broker-
dealer will disclose its fees and costs through a standardized fee
schedule, delivered to the retail customer at the beginning of the
relationship, or, for existing retail customers, prior to or at the
time of a recommendation and, as discussed below, will amend such fee
schedules in the event of material changes. Although we understand that
many broker-dealers already provide fee schedules to retail customers,
we are assuming for purposes of this analysis that a fee schedule would
be created specifically for purposes of compliance with Regulation Best
Interest.\1426\ While the Commission recognizes that the fee disclosure
included in Disclosure Obligation applies to the broker-dealer entity
and its associated persons, we do not expect any burdens or costs on
associated persons related to the fees and costs as this information
would be addressed in the broker-dealer entity's fee schedule.
---------------------------------------------------------------------------

    \1426\ Our estimates may be higher than actual, since firms may
be able to use or simply update existing disclosures depending on
the facts and circumstances.
---------------------------------------------------------------------------

i. Initial Costs and Burdens
    We assume that, for purposes of this analysis, the associated costs
and burdens will differ between small and large broker-dealers, as
large broker-dealers generally offer more products and services and
therefore will need to evaluate a wider range of fees in their fee
schedules. As stated above, while we anticipate that many broker-
dealers may already create fee schedules, we believe that small broker-
dealers will initially spend five hours for in-house compliance and
large broker-dealers will spend ten hours for in-house compliance to
internally create a new fee schedule in consideration of the
requirements of Regulation Best Interest. We additionally estimate a
one-time external cost of $2,485 for small broker-dealers \1427\ and
$4,970 for larger broker-dealers for outside counsel to review the fee
schedule.\1428\ We therefore estimate the initial aggregate burden for
small broker-dealers to be 3,780 burden

hours,\1429\ and the initial aggregate cost to be $1.88 million.\1430\
We estimate the aggregate burden for large broker-dealers to be 20,100
burden hours,\1431\ and the aggregate cost to be $9.99 million.\1432\
---------------------------------------------------------------------------

    \1427\ This cost estimate is based on the following calculation:
(5 hours of review) x ($497/hour for outside counsel services) =
$2,485 outside counsel costs.
    \1428\ This cost estimate is based on the following calculation:
(10 hours of review) x ($497/hour for outside counsel services) =
$4,970 outside counsel costs.
    \1429\ This estimate is based on the following calculation: (5
burden hours of review per small broker-dealer) x (756 small broker-
dealers) = 3,780 aggregate initial burden hours.
    \1430\ This estimate is based on the following calculation:
($2,485 for outside counsel costs per small broker-dealer) x (756
small broker-dealers) = $1.88 million in aggregate initial outside
costs.
    \1431\ This estimate is based on the following calculation: (10
burden hours of review per large broker-dealer) x (2,010 large
broker-dealers) = 20,100 aggregate initial burden hours.
    \1432\ This estimate is based on the following calculation:
($4,970 for outside counsel costs per large broker-dealer) x (2,010
large broker-dealers) = $9.99 million in aggregate initial costs.
---------------------------------------------------------------------------

    Similar to delivery of the account disclosure regarding capacity
and type and scope of services, we estimate the burden for broker-
dealers to make the initial delivery of the fee schedule to new retail
customers, at the beginning of the relationship, and existing retail
customers, prior to or at the time of a recommendation, will require
approximately 0.02 hours to deliver to each retail customer.\1433\ As
stated above, we estimate that the 2,766 broker-dealers that report
retail activity have approximately 139 million customer accounts, and
that approximately 73.5%, or 102 million, of those accounts belong to
retail customers.\1434\ We therefore estimate that broker-dealers will
have an aggregate initial burden of 2,040,000 hours, or approximately
738 hours per broker-dealer for the first year after Regulation Best
Interest is in effect.\1435\
---------------------------------------------------------------------------

    \1433\ See supra footnote 1411.
    \1434\ See supra footnote 1412.
    \1435\ This estimate is based on the following calculation: (102
million retail customer accounts) x (.02 hours for delivery to each
customer account) = 2,040,000 aggregate burden hours. Conversely,
(2,040,000 aggregate burden hours)/(2,766 broker-dealers) = 738
burden hours per broker-dealer for the first year after Regulation
Best Interest is in effect.
---------------------------------------------------------------------------

    The total aggregate initial burden for broker-dealers is therefore
estimated at 2,063,880 \1436\ hours, and the total aggregate initial
cost is estimated at $11.87 million.\1437\
---------------------------------------------------------------------------

    \1436\ This estimate is based on the following calculations:
(3,780 aggregate burden hours for small broker-dealers) + (20,100
burden hours for large broker-dealers) + (2,040,000 burden hours for
delivery) = 2,063,880 total aggregate initial burden hours.
    \1437\ This estimate is based on the following calculation:
($1.88 million for small broker-dealer costs) + ($9.99 million large
broker-dealer costs) = $11.87 million in total initial aggregate
costs.
---------------------------------------------------------------------------

ii. Ongoing Costs and Burdens
    For purposes of this PRA analysis, we assume that broker-dealers
will review and amend the fee schedule on average, once a year. With
respect to small broker-dealers, we estimate that reviewing and
updating the fee schedule will require approximately two hours for in-
house compliance per year, and for large broker-dealers, we estimate
that the recurring, annual burden to review and update the fee schedule
will be four hours for in-house compliance for each large broker-
dealer. Based on these estimates, we estimate the recurring, aggregate,
annualized burden will be 1,512 hours for small broker-dealers \1438\
and 8,040 hours for large broker-dealers.\1439\ We do not anticipate
that small or large broker-dealers will incur outside legal,
compliance, or consulting fees in connection with updating their
standardized fee schedule since in-house personnel would be more
knowledgeable about these facts, and we therefore do not expect
external costs associated with updating the fee schedule.
---------------------------------------------------------------------------

    \1438\ This estimate is based on the following calculation: (2
burden hours per broker-dealer) x (756 small broker-dealers) = 1,512
aggregate burden hours per broker-dealer per year.
    \1439\ This estimate is based on the following calculation: (4
burden hours per broker-dealer) x (2,010 large broker-dealers) =
8,040 aggregate burden hours per broker-dealer per year.
---------------------------------------------------------------------------

    With respect to delivery of the amended fee schedule in the event
of a material change, we estimate that this would take place among 40%
of a broker-dealer's retail customer accounts annually, and that
broker-dealers will require approximately 0.02 hours to deliver the
amended fee schedule to each retail customer.\1440\ We therefore
estimate broker-dealers would incur a total annual aggregate burden of
816,000 hours, or 295 hours per broker-dealer.\1441\
---------------------------------------------------------------------------

    \1440\ See supra footnote 1411.
    \1441\ This estimate is based on the following calculation: (40%
of 102 million retail customer accounts) x (.02 hours) = 816,000
aggregate burden hours. Conversely, (816,000 aggregate burden
hours)/(2,766 broker-dealers) = 295 burden hours per broker-dealer
per year.
---------------------------------------------------------------------------

    The total ongoing aggregate burden for all broker-dealers to
review, amend, and deliver updated account disclosures to reflect
changes in fees and costs would be 825,552 burden hours per year.\1442\
---------------------------------------------------------------------------

    \1442\ This estimate is based on the following calculation:
(1,512 ongoing aggregate burden hours for small broker-dealers) +
(8,040 ongoing aggregate burden hours for large broker-dealers) +
(816,000 ongoing aggregate burden hours for delivery of amended
account disclosures) = 825,552 total ongoing aggregate burden hours
per year.
---------------------------------------------------------------------------

    The Commission acknowledges that the type of fee schedule may vary
greatly by broker-dealer, and therefore that the costs or burdens
associated with updating the standardized fee schedule might similarly
vary.
(3) Disclosure of All Material Facts Relating to Conflicts of Interest
Associated With the Recommendation
    Regulation Best Interest requires broker-dealers to provide a
retail customer, in writing, full and fair disclosure of all material
facts relating to conflicts of interest that are associated with the
recommendation. Because the Disclosure Obligation applies to both the
broker-dealer entity and its associated persons, the Commission expects
that the broker-dealer entity and its associated persons will incur
initial and ongoing burdens. However, as with the disclosure of the
capacity in which they are acting and type and scope of services, we
assume for purposes of this analysis that the broker-dealer entities
will incur the costs and burdens of disclosing material conflicts of
interest on behalf of their associated persons.\1443\
---------------------------------------------------------------------------

    \1443\ See Section IV.B.5 (discussing the costs and burdens
associated with record-making, including for associated persons of a
broker-dealer).
---------------------------------------------------------------------------

i. Initial Costs and Burdens
    The Disclosure Obligation provides broker-dealers with the
flexibility to choose the form and manner of conflict disclosure.
However, we believe that many or most broker-dealers will develop a
standardized conflict disclosure document and deliver it to their
retail customers.\1444\ We also assume for purposes of this PRA
analysis that broker-dealers will update and deliver the standardized
conflict disclosure document yearly on an ongoing basis, following the
broker-dealer's annual conflicts review process.
---------------------------------------------------------------------------

    \1444\ As noted above, we assume that delivery for new customers
will occur at the beginning of the relationship, and that delivery
for existing customers will occur prior to or at the time a
recommendation is made.
---------------------------------------------------------------------------

    For purposes of this PRA analysis, we assume that a standardized
conflict disclosure document will be developed by in-house counsel and
reviewed by outside counsel. For small broker-dealers, we estimate it
will take in-house counsel, on average, five burden hours to create the
standardized conflict disclosure document and outside counsel five
hours to review and revise the document. We estimate that the initial
aggregate burden for the development of a standardized disclosure
document, based on an estimated 756 small broker-dealers, will be 3,780
burden hours.\1445\ We additionally estimate an initial cost of

$2,485 per small broker-dealer,\1446\ and an aggregate initial cost of
$1.88 million for all small broker-dealers.\1447\
---------------------------------------------------------------------------

    \1445\ This estimate is based on the following calculation: (5
hours) x (756 small broker-dealers) = 3,780 aggregate initial burden
hours.
    \1446\ This estimate is based on the following calculation:
($497/hour) x (5 hours) = $2,485 in initial costs.
    \1447\ This estimate is based on the following calculation:
($497/hour x 5 hours) x (756 small broker-dealers) = $1.88 million
in aggregate initial costs.
---------------------------------------------------------------------------

    We expect the development and review of the standardized conflict
disclosure document to take longer for large broker-dealers because, as
discussed above, we believe large broker-dealers generally offer more
products and services and employ more individuals, and therefore will
need to disclose a larger number of conflicts. We estimate that for
large broker-dealers, it will take 7.5 burden hours for in-house
counsel to create the standardized conflict disclosure document, and
outside counsel will take another 7.5 hours to review and revise the
disclosure document. As a result, we estimate the initial aggregate
burden, based on an estimated 2,010 large broker-dealers, to be
approximately 15,075 burden hours.\1448\ We additionally estimate
initial costs of $3,728 per broker-dealer,\1449\ and an aggregate
initial cost for large broker-dealers of approximately $7.49
million.\1450\
---------------------------------------------------------------------------

    \1448\ This estimate is based on the following calculation: (7.5
hours x 2,010 large broker-dealers) = 15,075 aggregate initial
burden hours.
    \1449\ This estimate is based on the following calculation:
($497/hour) x (7.5 hours) = $3,728 in initial costs per broker-
dealer.
    \1450\ This estimate is based on the following calculation:
($497/hour) x (7.5 hours) x 2,010 large broker-dealers) = $7.49
million in aggregate costs.
---------------------------------------------------------------------------

    We assume that broker-dealers will deliver the standardized
conflict disclosure document to new retail customers at the inception
of the relationship, and to existing retail customers prior to or at
the time of a recommendation. We estimate that broker-dealers will
require approximately 0.02 hours to deliver the standardized conflict
disclosure document to each retail customer.\1451\ We therefore
estimate that broker-dealers will incur an aggregate initial burden of
2,040,000 hours, or approximately 738 hours per broker-dealer for
delivery of the standardized conflict disclosure document the first
year after Regulation Best Interest is in effect.\1452\
---------------------------------------------------------------------------

    \1451\ See supra footnote 1411. For purposes of this PRA
analysis, we have assumed any initial disclosures made by the
broker-dealer related to material conflicts of interest will be
delivered together.
    \1452\ These estimates are based on the following calculations:
(0.02 hours per customer account x 102 million retail customer
accounts) = 2,040,000 aggregate initial burden hours. Conversely,
(2,040,000 hours)/(2,766 broker-dealers) = 738 burden hours per
broker-dealer.
---------------------------------------------------------------------------

    The total aggregate initial burden for broker-dealers is therefore
estimated at 2,058,855 \1453\ hours, and the total aggregate initial
cost is estimated at $9.37 million.\1454\
---------------------------------------------------------------------------

    \1453\ This estimate is based on the following calculations:
(3,780 aggregate burden hours for small broker-dealers) + (15,075
burden hours for large broker-dealers) + (2,040,000 burden hours for
delivery) = 2,058,855 total aggregate initial burden hours.
    \1454\ This estimate is based on the following calculation:
($1.88 million for small broker-dealer costs) + ($7.49 million large
broker-dealer costs) = $9.37 million in total aggregate initial
costs.
---------------------------------------------------------------------------

ii. Ongoing Costs and Burdens
    We believe that broker-dealers will incur ongoing annual burdens
and costs to update the disclosure document to include newly identified
conflicts. We assume for purposes of this analysis that broker-dealers
will update their conflict disclosure document annually, after
conducting an annual conflicts review. We estimate that the conflicts
disclosures will be updated internally by both small and large broker-
dealers.
    We estimate that in-house counsel at a small broker-dealer will
require approximately one hour per year to update the standardized
conflict disclosure document, for an ongoing aggregate, annual burden
of approximately 756 hours.\1455\ For large broker-dealers, we estimate
that the ongoing, aggregate annual burden would be two hours for each
broker-dealer: One hour for in-house compliance and one hour for in-
house counsel for legal personnel. We therefore estimate the ongoing,
aggregate burden for large broker-dealers to be approximately 4,020
burden hours.\1456\ We do not anticipate that small or large broker-
dealers will incur outside legal, compliance, or consulting fees in
connection with updating their standardized conflict disclosure
document, since in-house personnel would presumably be more
knowledgeable about conflicts of interest.
---------------------------------------------------------------------------

    \1455\ This estimate is based on the following calculation: (1
hour per broker-dealer) x (756 small broker-dealers) = 756 aggregate
burden hours per year.
    \1456\ This estimate is based on the following calculation: (2
hours per broker-dealer) x (2,010 large broker-dealers) = 4,020
aggregate burden hours per year.
---------------------------------------------------------------------------

    With respect to ongoing delivery of the updated conflict disclosure
document, we estimate that this will take place among 40% of a broker-
dealer's retail customer accounts annually, and that broker-dealers
will require approximately 0.02 hours to deliver the updated conflict
disclosure document to each retail customer.\1457\ We therefore
estimate that broker-dealers will incur an ongoing, aggregate annual
burden of 816,000 hours, or 295 burden hours per broker-dealer.\1458\
The total aggregate ongoing burden for broker-dealers is therefore
estimated at 820,776 hours.\1459\
---------------------------------------------------------------------------

    \1457\ See supra footnote 1411. The Commission estimates that
broker-dealers will update their disclosures of fees and costs and
material facts relating to conflicts of interest that are associated
with their recommendation more frequently than disclosure related to
capacity or type and scope of services.
    \1458\ This estimate is based on the following calculation: (40%
of 102 million retail customer accounts) x (.02 hours) = 816,000
aggregate burden hours per year. Conversely, (816,000 aggregate
burden hours)/(2,766 broker-dealers) = 295 hours per broker-dealer
per year.
    \1459\ This estimate is based on the following calculations:
(756 aggregate burden hours for small broker-dealers) + (4,020
aggregate burden hours for large broker-dealers) + (816,000
aggregate burden hours for delivery) = 820,776 total aggregate
ongoing burden hours.
---------------------------------------------------------------------------

    Based on the calculation describe above, we estimate that broker-
dealers will incur an aggregate total initial burden of 6,216,125 hours
\1460\ and a total initial cost of $42.84 million,\1461\ as well as an
aggregate total ongoing annual burden of 2,101,493 hours \1462\ to
comply with the Disclosure Obligation.
---------------------------------------------------------------------------

    \1460\ This estimate is based on the following calculation:
(2,093,390 aggregate initial burden hours for initial compliance
with disclosure of capacity and type and scope of services) +
(2,063,880 aggregate initial burden hours for initial compliance
with disclosure of fees and costs) + (2,058,855 aggregate initial
burden hours for initial compliance with disclosure of all material
facts regarding disclosure of conflicts of interest associated with
the recommendation) = 6,216,125 total aggregate initial burden hours
for compliance with the Disclosure Obligation.
    \1461\ This estimate is based on the following calculation:
($21.6 million aggregate initial cost for compliance with disclosure
of capacity and type and scope of services) + ($11.87 million
aggregate initial cost for compliance with disclosure of fees and
costs) + ($9.37 aggregate initial cost for compliance with
disclosure of all material facts regarding disclosure of conflicts
of interest associated with the recommendation) = $42.84 million
total aggregate initial cost for compliance with the Disclosure
Obligation.
    \1462\ This estimate is based on the following calculation:
(455,165 aggregate annual burden hours for ongoing compliance with
disclosure of capacity and type and scope of services) + (825,552
aggregate annual burden hours for ongoing compliance with disclosure
of fees and costs) + (820,776 aggregate annual burden hours for
ongoing compliance with disclosure of all material facts regarding
disclosure of conflicts of interest associated with the
recommendation) = 2,101,493 total aggregate burden hours per year
for ongoing compliance with the Disclosure Obligation.
---------------------------------------------------------------------------

2. Care Obligation
    The Care Obligation requires a broker-dealer to have a reasonable
basis to believe, based on its understanding of the potential risks,
rewards, and costs of the recommended security or investment strategy
involving securities,

and in light of the retail customer's investment profile, that the
recommendation is in the best interest of the particular retail
customer and does not place the broker-dealer's interest ahead of the
retail customer's interest. However, any PRA burdens or costs
associated with the Care Obligation are duplicative of costs associated
with other obligations in Regulation Best Interest, including the
Disclosure Obligation and the Record-Making Obligation under Rule 17a-
3(a)(35) and Recordkeeping Obligation under Rule 17a-4(e)(5).
3. Conflict of Interest Obligation
    The Conflict of Interest Obligation creates an overarching
obligation to require broker-dealers \1463\ to establish written
policies and procedures reasonably designed to identify and at a
minimum disclose, pursuant to the Disclosure Obligation, or eliminate
all conflicts of interest associated with a recommendation. More
specifically, broker-dealers are specifically required to establish,
maintain, and enforce written policies and procedures reasonably
designed to: (i) Identify and mitigate any conflicts of interest
associated with recommendations that create an incentive for a natural
person who is an associated person of a broker or dealer to place the
interest of the broker or dealer, or such natural person making the
recommendation, ahead of the interest of the retail customer; (ii) (A)
identify and disclose any material limitations placed on the securities
or investment strategies involving securities that may be recommended
to a retail customer and any conflicts of interest associated with such
limitations, in accordance with the Disclosure Obligation, and (B)
prevent such limitations and associated conflicts of interest from
causing the broker, dealer, or a natural person who is an associated
person of the broker or dealer to make recommendations that place the
interest of the broker, dealer, or such natural person ahead of the
interest of the retail customer; and (iii) identify and eliminate sales
contests, bonuses, and non-cash compensation that are based on the
sales of specific securities or specific types of securities within a
limited period of time.\1464\
---------------------------------------------------------------------------

    \1463\ As discussed above, the Conflict of Interest Obligation
and Compliance Obligation apply solely to the broker or dealer
entity, and not to the associated persons of a broker or dealer.
    \1464\ Rule 15l-1 under the Exchange Act.
---------------------------------------------------------------------------

    Written policies and procedures developed pursuant to the Conflict
of Interest Obligation of Regulation Best Interest would help a broker-
dealer to develop a process reasonably designed for its business, for
identifying conflicts of interest, and then determining whether to
eliminate, or disclose and/or mitigate the conflict and the appropriate
means of eliminating, disclosing and/or mitigating the conflict. In
addition, establishing and maintaining written policies and procedures
would generally (1) assist a broker-dealer in supervising its
associated persons and assessing compliance with the Conflict of
Interest Obligation; and (2) assist the Commission and SRO staff in
connection with examinations and investigations.\1465\
---------------------------------------------------------------------------

    \1465\ See Section II.C.3.a.
     Any written policies and procedures developed pursuant to
Regulation Best Interest would be required to be retained pursuant
to Exchange Act Rule 17a-4(e)(7), which requires broker-dealers to
retain compliance, supervisory, and procedures manuals (and any
updates, modifications, and revisions thereto) describing the
policies and procedures of the broker-dealer with respect to
compliance with applicable laws and rules, and supervision of the
activities of each associated, for a specified period of time. The
record retention requirements of Rule 17a-4(e)(7) include any
written policies and procedures that broker-dealers may produce
pursuant to the Conflict of Interest Obligation of Regulation Best
Interest.
---------------------------------------------------------------------------

    In light of the modifications to several substantive requirements
of the rule relative to the Proposing Release, including the Conflict
of Interest Obligation, as discussed in more detail above, we believe
these changes will allow broker-dealers' to more easily incorporate the
requirements of Regulation Best Interest into existing supervisory and
compliance systems and streamline compliance with Regulation Best
Interest.\1466\ Therefore, we generally believe our proposed burdens
and costs are accurate but have updated estimates to reflect changes in
the number of broker-dealers and costs of certain services since the
last estimate in the Proposing Release.
---------------------------------------------------------------------------

    \1466\ See Section II.C.3.
---------------------------------------------------------------------------

    Following is a detailed discussion of the estimated costs and
burdens associated with the Conflict of Interest Obligation.
a. Written Policies and Procedures
i. Initial Costs and Burdens
    We believe that most broker-dealers have policies and procedures in
place to address conflicts of interest, but do not necessarily have
written policies and procedures regarding the identification and
management of conflicts as required by Regulation Best Interest. To
comply with the Conflict of Interest Obligation, we believe that
broker-dealers would utilize a combination of in-house and outside
legal and compliance counsel to update existing policies and
procedures.\1467\ We assume that, for purposes of this analysis, the
associated costs and burdens would differ between small and large
broker-dealers, as large broker-dealers generally offer more products
and services and therefore would need to evaluate and address a greater
number of potential conflicts of interest. As discussed above, we
estimate that 2,010 broker-dealers would qualify as large broker-
dealers for purposes of this analysis and 756 would qualify as small
broker-dealers that have retail business.\1468\
---------------------------------------------------------------------------

    \1467\ See footnote 1381 and accompanying text.
    \1468\ See footnote 1387 and accompanying text.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that a large broker-dealer
would incur a one-time internal burden of 60 hours for in-house legal
and in-house compliance counsel to update existing policies and
procedures to comply with Regulation Best Interest.\1469\ We also
estimated a cost of $4,720 for outside counsel to review updated
policies and procedures on behalf of a large broker-dealer, with an
aggregate initial burden of 123,300 burden hours and aggregate initial
cost of $9.70 million for large broker-dealers.\1470\
---------------------------------------------------------------------------

    \1469\ See Proposing Release at 21666.
    \1470\ Id.
---------------------------------------------------------------------------

    In the Proposing Release, we assumed that small broker-dealers
would primarily rely on outside counsel to update existing policies and
procedures, as small broker-dealers generally have fewer in-house legal
and compliance personnel. Given that smaller broker-dealers generally
have fewer conflicts of interest, we estimated that 40 hours of outside
legal counsel services would be required, for a one-time cost of
$18,800 per small broker-dealer, and an aggregate cost of $15.1 million
for all small broker-dealers, and we also expected that in-house
compliance personnel would require 10 hours to review and approve the
updated policies and procedures, for an aggregate burden of 8,020
hours.\1471\ Therefore, we estimated the total initial aggregate burden
to be 131,320 hours and the total initial aggregate cost to be $24.8
million.\1472\
---------------------------------------------------------------------------

    \1471\ Id.
    \1472\ Id.
---------------------------------------------------------------------------

    We believe our estimates are generally accurate in light of the
increased specificity in Regulation Best Interest as to how a broker-
dealer must address specified conflicts of interest but due to changes
in the number of broker-dealers and cost estimates for certain
services, we are revising our burden and cost estimates.\1473\
---------------------------------------------------------------------------

    \1473\ We have revised our cost estimates to reflect the updated
SIFMA Management and Professional Earnings Report which was updated
in 2019 to reflect inflation. Therefore, the hourly rates used here
for certain services, for example, outside legal counsel and outside
compliance costs, are higher than the numbers in the Proposing
Release.

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

    For purposes of Regulation Best Interest as adopted, we estimate
that a large broker-dealer would incur an initial burden of 50 hours
for in-house counsel and in-house compliance to update existing
policies and procedures to comply with Regulation Best Interest and an
initial burden of 5 hours for general counsel and 5 hours for a Chief
Compliance Officer to review and approve the updated policies and
procedures, for a total of 60 burden hours.\1474\ We also estimate ten
hours of outside counsel services will be required at a cost of $4,970
to review updated policies and procedures on behalf of a large broker-
dealer.\1475\ We therefore estimate the aggregate initial burden for
large broker-dealers to be of 120,600 burden hours \1476\ and initial
aggregate cost of approximately $10.0 million for large broker-
dealers.\1477\
---------------------------------------------------------------------------

    \1474\ This estimate is based on the following calculation: (50
hours of review for in-house counsel and in-house compliance
counsel) + (5 hours of review for general counsel) + (5 hours of
review for Chief Compliance Officer) = 60 initial burden hours per
large broker-dealer.
    \1475\ Data from the SIFMA Management and Professional Earnings
Report suggests that the average hourly rate for legal services is
$497/hour. This cost estimate is therefore based on the following
calculation: (10 hours of review) x ($497/hour for outside counsel
services) = $4,970 in outside counsel costs per large broker-dealer.
    \1476\ This estimate is based on the following calculation: (60
burden hours of review per large broker-dealer) x (2,010 large
broker-dealers) = 120,600 aggregate burden hours for large broker-
dealers.
    \1477\ This estimate is based on the following calculation:
($4,970 for outside counsel costs per large broker-dealer) x (2,010
large broker-dealers) = approximately $10.0 million in outside
counsel costs for large broker-dealers.
---------------------------------------------------------------------------

    For small broker-dealers, we believe that they would primarily rely
on outside counsel to update existing policies and procedures, as small
broker-dealers generally have fewer in-house legal and compliance
personnel. Given that smaller broker-dealers generally have fewer
conflicts of interest, we estimate that 40 hours of outside legal
counsel would be required to update existing policies and procedures,
for a one-time cost of $19,880 per small broker-dealer,\1478\ and an
aggregate cost of $15.0 million for all small broker-dealers.\1479\ We
also expect that in-house compliance would require 10 hours to review
and approve the updated policies and procedures, for an aggregate
burden of 7,560 hours.\1480\ Therefore, we estimate the total initial
aggregate burden to be 128,160 hours \1481\ and the total initial
aggregate cost to be approximately $25.0 million.\1482\
---------------------------------------------------------------------------

    \1478\ This cost estimate is based on the following calculation:
(40 hours of review) x ($497/hour for outside counsel services) =
$19,880 in outside counsel costs per small broker-dealer.
    \1479\ This cost estimate is based on the following calculation:
($19,880 for outside attorney costs per small broker-dealer) x (756
small broker-dealers) = approximately $15.0 million in outside
counsel costs for small broker-dealers.
    \1480\ This estimate is based on the following calculation: (10
burden hours) x (756 small broker-dealers) = 7,560 aggregate burden
hours.
    \1481\ This estimate is based on the following calculation:
(120,600 aggregate burden hours for large broker-dealers) + (7,560
aggregate burden hours for small broker-dealers) = 128,160 total
aggregate burden hours.
    \1482\ This estimate is based on the following calculation: ($10
million in aggregate costs for large broker-dealers) + ($15.0
million in aggregate costs for small broker-dealers) = $25.0 million
total aggregate costs.
---------------------------------------------------------------------------

ii. Ongoing Costs and Burdens
    For purposes of this analysis, we assume that small and large
broker-dealers would review and update policies and procedures on an
annual basis to accommodate the addition of, for example, new products
or services, new business lines, and/or new personnel. We also assume
that broker-dealers would review and update their policies and
procedures for compliance with the Conflict of Interest Obligation on
an annual basis, and in-house personnel would perform the review and
make any updates.
    In the Proposing Release, we estimated that large broker-dealers
would incur an annual internal burden of 12 hours to review and update
existing policies and procedures to identify new conflicts for an
ongoing, aggregate burden of 24,660 hours with no ongoing costs as they
would rely on internal personnel.\1483\ We assumed small broker-dealers
would rely on outside legal counsel and compliance consultants to
review and update policies and procedures, with final review and
approval from in-house compliance \1484\ with an aggregate, annual
ongoing cost of $3.08 million per year.\1485\ In addition to these
costs, we believed that small broker-dealers would incur an internal an
ongoing, aggregate burden of 28,670 hours. While the Commission
believes our time estimates from the Proposing Release are generally
accurate, we have revised our burdens and estimates to account for
changes in both the number of broker-dealers and external costs of
services.
---------------------------------------------------------------------------

    \1483\ Proposing Release at 21667.
    \1484\ Id.
    \1485\ Id.
---------------------------------------------------------------------------

    We estimate that large broker-dealers, which generally have more
numerous and complex products and services, as well as and higher rates
of hiring and turnover would incur an annual internal burden of 12
hours to review and update existing policies and procedures: Four hours
for in-house counsel, four hours for in-house compliance, and four
hours for business-line personnel to identify new conflicts. We
therefore estimate an ongoing, aggregate burden for large broker-
dealers of approximately 24,120 hours.\1486\ Because we assume that
large broker-dealers would rely on internal personnel to update
policies and procedures on an ongoing basis, we do not believe large
broker-dealers would incur ongoing external costs.
---------------------------------------------------------------------------

    \1486\ This estimate is based on the following calculation: (12
burden hours per large broker-dealer) x (2,010 large broker-dealers)
= 24,120 aggregate ongoing burden hours.
---------------------------------------------------------------------------

    We assume for purposes of this analysis that small broker-dealers,
generally have fewer and less complex products and lower rates of
hiring. We also assume they would primarily rely on outside legal
counsel and outside compliance consultants for review and update of
their policies and procedures, with final review and approval from an
in-house compliance manager. We estimate that outside legal counsel
would require approximately five hours per year to update policies and
procedures, for an annual cost of $2,485 for each small broker-
dealer.\1487\ The projected aggregate, annual ongoing cost for outside
legal counsel to update policies and procedures for small broker-
dealers would be $1.88 million per year.\1488\ In addition, we expect
that small broker-dealers would require five hours of outside
compliance services per year to update their policies and procedures,
for an ongoing cost of $1,365 per year,\1489\ and an aggregate ongoing
cost of $1.03 million.\1490\ The total aggregate, ongoing cost for
small

broker-dealers is therefore projected at $2.91 million per year.\1491\
---------------------------------------------------------------------------

    \1487\ This estimate is based on the following calculation: (5
hours per small broker-dealer) x ($497/hour for outside counsel
services) = $2,485 in outside counsel costs.
    \1488\ This estimate is based on the following calculation:
($2,485 in outside counsel costs per small broker-dealer) x (756
small broker-dealers) = $1.88 million in aggregate, ongoing outside
legal costs per year.
    \1489\ We believe that performance of this function will most
likely be equally allocated between a senior compliance examiner and
a compliance manager. Data from the SIFMA Management and
Professional Earnings Report suggests that costs for these positions
are $237 and $309 per hour, respectively for an average of $273 per
hour. This cost estimate is based on the following calculation: (5
hours of review) x ($273/hour for outside compliance services) =
$1,365 in outside compliance service costs.
    \1490\ This estimate is based on the following calculation:
($1,365 in outside compliance costs per small broker-dealer) x (756
small broker-dealers) = $1.03 million in aggregate, ongoing outside
compliance costs per year.
    \1491\ This estimate is based on the following calculation:
($1.88 million for outside legal counsel costs) + ($1.03 million for
outside compliance costs) = $2.91 million total aggregate ongoing
costs per year.
---------------------------------------------------------------------------

    In addition to the costs described above, we additionally believe
small broker-dealers would incur an internal burden of approximately 5
hours for an in-house compliance manager to review and approve the
updated policies and procedures per year. The ongoing, aggregate burden
for small broker-dealers would be 3,780 hours for in-house compliance
manager review.\1492\
---------------------------------------------------------------------------

    \1492\ This estimate is based on the following calculation: (5
hours compliance manager review per small broker-dealer) x (756
small broker-dealers) = 3,780 aggregate ongoing burden hours per
year.
---------------------------------------------------------------------------

    We therefore estimate the total ongoing aggregate ongoing burden to
be 27,900 hours per year \1493\ and the total ongoing aggregate cost to
be $2.91 million per year.\1494\
---------------------------------------------------------------------------

    \1493\ This estimate is based on the following calculation:
(24,120 aggregate ongoing burden hours for large broker-dealers) +
(3,780 aggregate ongoing burden hours for small broker-dealers) =
27,900 total aggregate ongoing burden hours per year.
    \1494\ This estimate is based on the following calculation:
($2.91 million per year in total aggregate ongoing costs for small
broker-dealers) + ($0 projected ongoing costs for large broker-
dealers) = $2.91 million per year in total aggregate ongoing costs.
---------------------------------------------------------------------------

    The Commission acknowledges that policies and procedures may vary
greatly by broker-dealer, given the differences in size and the
complexity of broker-dealer business models. Accordingly, we expect
that the need to update policies and procedures might also vary
greatly.
b. Identification and Management of Conflicts of Interest
    With respect to identifying and determining whether a conflict of
interest exists in connection with a recommendation and whether it
needs to be addressed through disclosure, mitigation and/or
elimination, a broker-dealer would first need to establish mechanisms
to proactively and systematically identify conflicts of interest in its
business on an ongoing or periodic basis.\1495\ For purposes of this
analysis, we assume that most broker-dealers already have an existing
technological infrastructure in place, and we assume it would need to
be modified to comply with the Conflict of Interest Obligation.
---------------------------------------------------------------------------

    \1495\ See supra Section III.C.3.
---------------------------------------------------------------------------

i. Initial Costs and Burdens
    As stated in the Proposing Release, we believed that costs and
burdens may vary greatly depending on the size of the broker-dealer,
but we expected that modification of a broker-dealer's existing
technology would initially require the retention of an outside
programmer as well as coordination between the programmer and the
broker-dealer's in-house compliance manager. The costs and burdens for
this process were estimated to be $15.43 million and 14,285 burden
hours.\1496\ In addition to these costs and burdens, we expected that a
broker-dealer would spend time to determine whether the conflict of
interest identified were material and would have required an additional
14,285 burden hours for all broker-dealers for an aggregate burden of
28,570 hours for identification of conflicts of interest.\1497\
---------------------------------------------------------------------------

    \1496\ Proposing Release at 21667.
    \1497\ Id.
---------------------------------------------------------------------------

    As stated above, we believe the process would be largely the same
as set forth in the Proposing Release but have revised our estimates
and costs below to account for changes in the number of broker-dealers
and external costs as well as to account for some changes to the
structure of the Conflict of Interest Obligation.
    To comply with the Conflict of Interest Obligation, we expect that
broker-dealers will modify existing technology through the work of an
outside programmer which would require, on average, an estimated 20
hours, for an estimated cost per broker-dealer of $5,680.\1498\ We
additionally continue to estimate (as was set forth in the Proposing
Release) that coordination between the programmer and the broker-
dealer's compliance manager would involve five burden hours.\1499\ The
aggregate initial costs and burdens for the modification of existing
technology to identify conflicts of interest would therefore be $15.71
million,\1500\ and 13,830 burden hours.\1501\
---------------------------------------------------------------------------

    \1498\ Data from the SIFMA Management and Professional Earnings
Report suggests that the average hourly rate for technology services
in the securities industry is $284. This cost estimate is based on
the following calculation: (20 hours of review) x ($284/hour for
technology services) = $5,680.
    \1499\
    \1500\ This cost estimate is based on the following calculation:
($5,680 in outside programmer costs per broker-dealer) x (2,766
broker-dealers) = $15.71 million in aggregate outside programmer
costs.
    \1501\ This burden estimate is based on the following
calculation: (5 burden hours for in-house compliance manager) x
(2,766 broker-dealers) = 13,830 aggregate burden hours.
---------------------------------------------------------------------------

    As a result of the changes made to the rule text of the Conflict of
Interest Obligation, we believe that broker-dealers would incur burdens
to: (1) Identify conflicts of interest and determine whether the
conflict involves an incentive to an associated person to place the
interest of the broker-dealer or natural person making the
recommendation ahead of the interest of the retail customer, a material
limitation on the product menu, or a sales practice that is based on
the sales of specific securities or specific types of securities within
a limited period of time and (2) determine whether and how the conflict
would be disclosed, disclosed and mitigated, or eliminated in
accordance with the Conflict of Interest Obligation. In order to
complete this process, we believe a broker-dealer, on average, would
require approximately 20 hours \1502\ of review per broker-
dealer,\1503\ for an aggregate of 55,320 burden hours for all broker-
dealers.\1504\ We therefore estimate the total initial aggregate burden
for identification and management of conflicts of interest is 69,150
hours.\1505\
---------------------------------------------------------------------------

    \1502\ In light of the changes made to the rule text of the
Conflict of Interest Obligation and the comments received, we have
increased our estimate to 20 burden hours per broker-dealer.
    \1503\ This burden estimate consists of 10 hours for review by
business line personnel, and 10 hours for review by in-house
compliance manager.
    \1504\ This burden estimate is based on the following
calculation: (20 burden hours) x (2,766 broker-dealers) = 55,320
aggregate burden hours.
    \1505\ This burden estimate is based on the following
calculation: (13,830 burden hours for modification of technology) +
(55,320 burden hours for evaluation of managing conflicts) = 69,150
total aggregate burden hours.
---------------------------------------------------------------------------

ii. Ongoing Costs and Burdens
    To maintain compliance with the Conflict of Interest Obligation, we
assume for purposes of this analysis that a broker-dealer would seek to
identify additional conflicts of interest as its business evolves. As
noted above, the Commission recognizes that broker-dealers vary in the
types of services and product offerings and therefore vary in the types
of conflicts of interest that exist within and across broker-
dealers.\1506\
---------------------------------------------------------------------------

    \1506\ See supra Section II.C.3.
---------------------------------------------------------------------------

    However, for purposes of the PRA analysis in the Proposing Release,
we assumed that broker-dealers would, at a minimum, engage in a
material conflicts identification process on an annual basis, and we
estimated that in the aggregate broker-dealers would spend
approximately 28,570 hours each to complete this process per
year.\1507\ Similar to the Proposing Release, we believe that for
purposes of this analysis, broker-dealers would, through the help of
the business line and compliance personnel, spend on average 10 hours
\1508\ to perform an annual

conflicts review using the modified technology infrastructure.\1509\
Therefore, the Commission estimates that the aggregate ongoing burden
for an annual conflicts review, based on an estimated 2,766 retail
broker-dealers, would be approximately 27,660 burden hours per
year.\1510\ Because we assume that broker-dealers would use in-house
personnel to identify and evaluate new, potential conflicts, we
continue to believe they would not incur additional ongoing external
costs.
---------------------------------------------------------------------------

    \1507\ See Proposing Release at 21668.
    \1508\ This burden estimate consists of five hours for review by
business line personnel, and five hours for review by an in-house
compliance manager.
    \1509\ FINRA rules set an annual supervisory review as a minimum
threshold for broker-dealers. See, e.g., FINRA Rules 3110 (requiring
an annual review of the businesses in which the broker-dealer
engages); 3120 (requiring an annual report detailing a broker-
dealer's system of supervisory controls, including compliance
efforts in the areas of antifraud and sales practices); and 3130
(requiring each broker-dealer's CEO or equivalent officer to certify
annually to the reasonable design of the policies and procedures for
compliance with relevant regulatory requirements).
    \1510\ This estimate is based on the following calculation: (10
hours per retail broker-dealer) x (2,766 retail broker-dealers) =
27,660 aggregate burden hours per year.
---------------------------------------------------------------------------

c. Training
    As discussed in the Proposing Release, we expect that broker-
dealers would develop training programs to comply with Regulation Best
Interest, including the Conflict of Interest Obligation. However, we
believe that any burdens and costs associated with a training program
would fall under the new Compliance Obligation as it would be developed
to comply with Regulation Best Interest as a whole, including each of
the component obligations.
    In total, to comply with the Conflict of Interest Obligation, the
Commission estimates that the total initial burdens and costs to be
197,310 hours \1511\ and $40.71 million,\1512\ and the total ongoing
burdens and costs to be 55,560 hours \1513\ per year and $2.91 million
per year.\1514\
---------------------------------------------------------------------------

    \1511\ This estimate is based on the following calculation:
(128,160 initial burden hours for policies and procedures) + (69,150
initial burden hours for identification and management of conflicts
of interest) = 197,310 initial burden hours to comply with the
Conflict of Interest Obligation.
    \1512\ This estimate is based on the following calculation:
($25.0 million initial costs for policies and procedures) + ($15.71
million initial costs for identification and management of conflicts
of interest) = $40.71 million initial total costs to comply with the
Conflict of Interest Obligation.
    \1513\ This estimate is based on the following calculation:
(27,900 ongoing burden hours for policies and procedures) + (27,660
ongoing burden hours for identification and management of conflicts
of interest) = 55,560 aggregate ongoing burden hours per year to
comply with Conflict of Interest Obligation.
    \1514\ This estimate is based on the following calculation:
($2.91 million ongoing costs for policies and procedures) + ($0
ongoing costs for identification and management of conflicts of
interest) = $2.91 million aggregate ongoing total costs per year to
comply with the Conflict of Interest Obligation.
---------------------------------------------------------------------------

4. Compliance Obligation
    As discussed above, in response to comments that we should require
policies and procedures to comply with Regulation Best Interest as a
whole, we are adopting the Compliance Obligation.\1515\ The Compliance
Obligation requires that the broker-dealer \1516\ establish, maintain
and enforce written policies and procedures reasonably designed to
achieve compliance with Regulation Best Interest. This Compliance
Obligation creates an explicit obligation under the Exchange Act with
respect to Regulation Best Interest as a whole. Similar to the policies
and procedures requirement of the Conflict of Interest Obligation,
broker-dealers will have flexibility to design policies and procedures
that are reasonable for the scope, size and risks associated with the
operations of the firm and the types of business in which the broker-
dealer engages. Because we did not include the Compliance Obligation in
the Proposing Release, we did not previously include costs and burdens
associated with the Compliance Obligation, but we have provided a
detailed explanation of these costs and burdens below.\1517\
---------------------------------------------------------------------------

    \1515\ Section II.C.4.
    \1516\ See supra footnote 1462 and accompanying text.
    \1517\ We note that any burdens and costs to comply with the
Conflict of Interest Obligation are included in the estimates in
Section IV.B.3 above.
---------------------------------------------------------------------------

a. Written Policies and Procedures
i. Initial Costs and Burdens
    While the Compliance Obligation creates an explicit requirement
under the Exchange Act, we believe that broker-dealers would likely
establish policies and procedures to comply with Regulation Best
Interest pursuant to Section 15(b)(4)(E) and SRO rules by adjusting
their current systems of supervision and compliance, as opposed to
creating new systems. While broker-dealers must already have policies
and procedures in place to address other Commission and SRO rules, they
would need to update their systems of supervision and compliance to
account for Regulation Best Interest.
    To comply with the Compliance Obligation, we believe that broker-
dealers would employ a combination of in-house and outside legal and
compliance counsel to update existing policies and procedures to
account for the Disclosure and Care Obligations.\1518\ We assume that,
for purposes of this analysis, the associated costs and burdens would
differ between small and large broker-dealers, as large broker-dealers
generally offer more products and services and employ more individuals
and therefore would need to evaluate and update a greater number of
systems. As discussed above, we estimate that 2,010 broker-dealers
would qualify as large broker-dealers for purposes of this analysis and
756 would qualify as small broker-dealers that have retail
business.\1519\
---------------------------------------------------------------------------

    \1518\ Id.
    \1519\ See supra footnote 1387 and accompanying text.
---------------------------------------------------------------------------

    For purposes of this analysis we estimate that a large broker-
dealer would incur a one-time average internal burden of 30 hours for
in-house legal personnel and in-house compliance counsel to update
existing policies and procedures to comply with the Compliance
Obligation and a one-time burden of five hours for general counsel and
five hours for a Chief Compliance Officer to review and approve the
updated policies and procedures, for a total of 40 burden hours.\1520\
We also estimate six hours of outside counsel services a cost of $2,982
for outside counsel to review updated policies and procedures on behalf
of a large broker-dealer.\1521\ We therefore estimate the aggregate
burden for large broker-dealers to be of 80,400 burden hours \1522\ and
aggregate cost of $6.0 million for large broker-dealers.\1523\
---------------------------------------------------------------------------

    \1520\ This estimate is based on the following calculation: (30
hours of review for in-house legal and in-house compliance) + (5
hours of review for general counsel) + (5 hours of review for Chief
Compliance Officer) = 40 burden hours.
    \1521\ Data from the SIFMA Management and Professional Earnings
Report suggests that the average hourly rate for legal services is
$497/hour. This cost estimate is therefore based on the following
calculation: (6 hours of review) x ($497/hour for outside counsel
services) = $2,982 in outside counsel costs.
    \1522\ This estimate is based on the following calculation: (40
burden hours of review per large broker-dealer) x (2,010 large
broker-dealers) = 80,400 aggregate burden hours.
    \1523\ This estimate is based on the following calculation:
($2,982 for outside counsel costs per large broker-dealer) x (2,010
large broker-dealers) = $6.0 million in outside counsel costs.
---------------------------------------------------------------------------

    For small broker-dealers, we believe that they would primarily rely
on outside counsel to update existing policies and procedures, as small
broker-dealers generally have fewer in-house legal and compliance
personnel. We estimate that only 20 hours of outside legal counsel
services would be required, for a one-time cost of $9,940 per small
broker-dealer,\1524\ and an aggregate cost of $7.5 million for all

small broker-dealers.\1525\ We also expect that in-house compliance
personnel would require 6 hours to review and approve the updated
policies and procedures, for an aggregate burden of 4,536 hours.\1526\
Therefore, we estimate the total initial aggregate burden to be 84,936
hours \1527\ and the total initial aggregate cost to be $13.5
million.\1528\
---------------------------------------------------------------------------

    \1524\ This cost estimate is based on the following calculation:
(20 hours of review) x ($497/hour for outside counsel services) =
$9,940 in outside counsel costs.
    \1525\ This cost estimate is based on the following calculation:
($9,940 for outside counsel costs per small broker-dealer) x (756
small broker-dealers) = $7.5 million in outside counsel costs.
    \1526\ This estimate is based on the following calculation: (6
burden hours) x (756 small broker-dealers) = 4,536 initial aggregate
burden hours.
    \1527\ This estimate is based on the following calculation:
(80,400 aggregate burden hours for large broker-dealers) + (4,536
aggregate burden hours for small broker-dealers) = 84,936 total
initial aggregate burden hours.
    \1528\ This estimate is based on the following calculation: ($6
million in aggregate costs for large broker-dealers) + ($7.5 million
in aggregate costs for small broker-dealers) = $13.5 million total
initial aggregate costs.
---------------------------------------------------------------------------

ii. Ongoing Costs and Burdens
    For purposes of this analysis, we assume that small and large
broker-dealers would review and update policies and procedures on a
periodic basis to accommodate the addition of, among other things, new
products or services, new business lines, and/or new personnel. We also
assume that broker-dealers would review and update their policies and
procedures for compliance with Regulation Best Interest on an annual
basis, and for purposes of this analysis, we assume they would perform
the review and update using in-house personnel. Under the Compliance
Obligation, we do not believe that broker-dealers would incur any costs
or burdens associated with compliance with the Conflict of Interest
Obligation, as those are included in the discussion above, but would
for ongoing compliance with the Disclosure and Care Obligations.
    For large broker-dealers with more numerous and complex products
and services, as well as higher rates of hiring and turnover, we
estimate that each broker-dealer would annually incur an internal
burden of 12 hours to review and update existing policies and
procedures: four hours for legal personnel, four hours for compliance
personnel, and four hours for business-line personnel. We therefore
estimate an ongoing, aggregate burden for large broker-dealers of
approximately 24,120 hours per year.\1529\
---------------------------------------------------------------------------

    \1529\ This estimate is based on the following calculation: (12
burden hours per large broker-dealer) x (2,010 large broker-dealers)
= 24,120 aggregate ongoing burden hours per year.
---------------------------------------------------------------------------

    We assume for purposes of this analysis that small broker-dealers,
who generally have fewer and less complex products, and lower rates of
hiring and turnover, would mostly rely on outside legal counsel and
compliance consultants for review and update of their policies and
procedures, with final review and approval from an in-house compliance
manager. We estimate that outside counsel would require approximately
five hours per year to update policies and procedures, for an annual
cost of $2,485 for each small broker-dealer.\1530\ The projected
aggregate, annual ongoing cost for outside legal counsel to update
policies and procedures for small broker-dealers would be $1.88
million.\1531\ In addition, we expect that small broker-dealers would
require five hours of outside compliance services per year to update
their policies and procedures, for an ongoing cost of $1,365 per
year,\1532\ and an aggregate ongoing cost of $1.03 million.\1533\ The
Commission estimates the total aggregate, ongoing cost for small
broker-dealers is therefore $2.91 million per year.\1534\
---------------------------------------------------------------------------

    \1530\ Data from the SIFMA Management and Professional Earnings
Report suggests that the average hourly rate for legal services is
$497/hour. This estimate is therefore based on the following
calculation: (5 hours per small broker-dealer) x ($497/hour for
outside counsel services) = $2,485 in outside counsel costs per
year.
    \1531\ This estimate is based on the following calculation:
($2,485 in outside counsel costs per small broker-dealer) x (756
small broker-dealers) = $1.88 million in aggregate, ongoing legal
costs per year.
    \1532\ We believe that performance of this function will most
likely be equally allocated between a senior compliance examiner and
a compliance manager. Data from the SIFMA Management and
Professional Earnings Report suggests that costs for these positions
are $237 and $309 per hour, respectively for an average of $273 per
hour. This estimate is therefore based on the following calculation:
(5 hours per small broker-dealer) x ($273/hour for outside counsel
services) = $1,365 in outside compliance service costs per year.
    \1533\ This estimate is based on the following calculation:
($1,365 in outside compliance costs per small broker-dealer) x (756
small broker-dealers) = $1.03 million in aggregate, ongoing outside
compliance costs per year.
    \1534\ This estimate is based on the following calculation:
($1.88 million for outside legal counsel costs) + ($1.03 million for
outside compliance costs) = $2.91 million total aggregate ongoing
costs per year.
---------------------------------------------------------------------------

b. Training
    Pursuant to the Compliance Obligation's requirement to ``maintain
and enforce'' written policies and procedures, we additionally believe
broker-dealers will develop training programs that promote compliance
with Regulation Best Interest. We believe that a training program would
cover compliance with Regulation Best Interest as a whole and would
therefore cover the Disclosure, Care and Conflict of Interest
Obligations. The initial and ongoing costs and burdens associated with
such a training program are estimated below.
i. Initial Costs and Burdens
    We believe that broker-dealers would likely use a computerized
training model to train their associated persons regarding the policies
and procedures pertaining to Regulation Best Interest. We estimate that
a broker-dealer would retain an outside systems analyst, outside
programmer, and an outside programmer analyst to create the training
module, at 20 hours, 40 hours, and 20 hours, respectively. The total
cost to develop the training module would be approximately
$20,920,\1535\ for an aggregate initial cost of $62.8 million.\1536\
---------------------------------------------------------------------------

    \1535\ Data from the SIFMA Management and Professional Earnings
Report suggests that the average hourly rate in the securities
industry is $263 for a systems analyst, $271 for a programmer, and
$241 for a programmer analyst.. This cost estimate is based on the
following calculation: ((20 hours for a systems analyst) x ($263/
hour)) + ((40 hours of labor for a programmer) x ($271/hour)) + ((20
hours of labor for a programmer analyst) x ($241/hour)) = $20,920 in
external technology costs per broker-dealer.
    \1536\ This estimate is based on the following calculation:
(2,766 broker-dealers) x ($20,920in external technology costs per
broker-dealer) = $57.9 million in aggregate costs for technology
services.
---------------------------------------------------------------------------

    Additionally, we expect that the training module would require the
approval of the Chief Compliance Officer, as well as in-house counsel,
each of whom would require approximately 2 hours to review and approve
the training module. The initial aggregate burden for broker-dealers is
therefore estimated at 11,064 burden hours.\1537\
---------------------------------------------------------------------------

    \1537\ This estimate is based on the following calculation:
(2,766 broker-dealers) x (4 burden hours per broker-dealer) = 11,064
burden hours.
---------------------------------------------------------------------------

    In addition, broker-dealers would incur an initial cost for
associated persons to undergo training through the training module. We
estimate the training time at one hour per associated person, for an
aggregate burden of 428,404 burden hours, or an initial burden of 154.9
hours per broker-dealer.\1538\ We estimate the total initial aggregate
burden to approve the training module and implement the training
program would be 439,486 burden hours.\1539\
---------------------------------------------------------------------------

    \1538\ This estimate is based on the following calculation: (1
burden hour) x (428,404 registered representatives at standalone or
dually registered broker-dealers) = 428,404 aggregate burden hours.
Conversely, (428,404 aggregate burden hours)/(2,766 retail broker-
dealers) = 154.9 initial burden hours per broker-dealer per year.
    \1539\ This estimate is based on the following calculation:
(428,404 burden hours for training of registered representatives) +
(11,064 burden hours to approve training program) = 439,468 total
aggregate burden hours per year.

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ii. Ongoing Costs and Burdens
    We believe that, as a matter of best practice, broker-dealers would
likely require registered representatives to repeat the training module
for Regulation Best Interest on an annual basis. The ongoing aggregate
cost for the one-hour training would be 428,404 burden hours per year,
or 154.9 burden hours per broker-dealer per year.\1540\
---------------------------------------------------------------------------

    \1540\ This estimate is based on the following calculation: (1
burden hour) x (428,404 registered representatives at standalone or
dually registered broker-dealers) = 428,404 burden hours.
Conversely, (428,404 aggregate burden hours) / (2,766 retail broker-
dealers) = 154.9 initial burden hours per broker-dealer.
---------------------------------------------------------------------------

    In total, to comply with the Compliance Obligation, the Commission
estimates the total initial burdens and costs to be 524,414 hours
\1541\ and $71.4 million,\1542\ and the total ongoing burdens and costs
to be 463,588 hours \1543\ and $2.91 million.\1544\
---------------------------------------------------------------------------

    \1541\ This estimate is based on the following calculation:
(84,946 initial burden hours for policies and procedures) + (439,468
initial burden hours training) = 524,414 initial burden hours to
comply with the Compliance Obligation.
    \1542\ This estimate is based on the following calculation:
($13.5 million initial costs for policies and procedures) + ($57.9
million initial costs for training) = $71.4 million initial total
costs to comply with the Compliance Obligation.
    \1543\ This estimate is based on the following calculation:
(24,120 ongoing burden hours for policies and procedures) + (439,468
ongoing burden hours for training) = 463,588 ongoing burden hours to
comply with Compliance Obligation.
    \1544\ This estimate is based on the following calculation:
($2.91 million ongoing costs for policies and procedures) + ($0
million ongoing costs for training) = $2.91 million ongoing costs to
comply with the Compliance Obligation.
---------------------------------------------------------------------------

5. Record-Making and Recordkeeping Obligations
    The record-making and recordkeeping obligations will impose record-
making and recordkeeping requirements on broker-dealers with respect to
certain information collected from, or provided to, retail customers.
Specifically, the Commission is amending Rules 17a-3 and 17a-4 of the
Exchange Act, which set forth minimum requirements with respect to the
records that broker-dealers must make, and how long those records and
other documents must be kept, respectively. Records made and retained
in accordance with the amendments to Rule 17a-3(a)(35) and 17a-4(e)(5)
will (1) assist a broker-dealer in supervising and assessing internal
compliance with Regulation Best Interest; and (2) assist the Commission
and SRO staff in connection with examinations and investigations.
    Due to changes in the number of broker-dealers and costs estimated
for certain services, we are revising our estimates from those in the
Proposing Release. However, while we understand commenters' concerns
that the estimates are lower than what would actually be required to
comply with Regulation Best Interest, we believe the estimates are
generally accurate in light of the increased specificity in Regulation
Best Interest on how to comply with the component obligations,
including the Disclosure Obligation.\1545\ The record-making and
recordkeeping costs and burdens associated with the amendments to Rule
17a-3(a)(35) and Rule 17a-4(e)(5) are addressed below.
---------------------------------------------------------------------------

    \1545\ See, e.g., Raymond James Letter; CCMC Letters; SIFMA
August 2018 Letter.
---------------------------------------------------------------------------

a. Record-Making Obligation
    We are amending Rule 17a-3 by adding a new paragraph (a)(35) that
requires a record of all information collected from, and provided to,
the retail customer pursuant to Regulation Best Interest, as well as
the identity of each natural person who is an associated person of a
broker or dealer, if any, responsible for the account.\1546\ This
requirement applies with respect to each retail customer to whom a
recommendation of any securities transaction or investment strategy
involving securities is provided. The neglect, refusal, or inability of
a retail customer to provide or update any such information will,
however, excuse the broker-dealer from obtaining that information.
---------------------------------------------------------------------------

    \1546\ As indicated in the Proposing Release, we understand that
broker-dealers likely make such records in the ordinary course of
their business pursuant to Exchange Act Rules 17a-3(a)(6) and (7).
We continue to believe, for purposes of compliance with Rule 17a-
3(a)(35), that broker-dealers would need to create a record, or
modify an existing record, to identify the associated person, if
any, responsible for the account in the context of Regulation Best
Interest. See Proposing Release at 21673.
---------------------------------------------------------------------------

    We indicated in the Proposing Release, and we continue to believe
that broker-dealers currently make records of relevant customer
investment profile information, and we therefore assume that no
additional record-making obligations would arise as a result of broker-
dealers' or their registered representatives' collection of information
from retail customers.\1547\ In addition, we continue to believe that
broker-dealers likely make records of the ``identity of each natural
person who is an associated person, if any, responsible for the
account.'' However, we are assuming, for purposes of compliance with
Rule 17a-3(a)(35), that broker-dealers will need to create a record, or
modify an existing record, to identify the associated person, if any,
responsible for the account in the context of Regulation Best Interest.
In addition, in cases where broker-dealers choose to meet part of the
Disclosure Obligation orally under the circumstances outlined in
Section II.C.1, Oral Disclosure or Disclosure After a Recommendation,
we believe the requirement to maintain a record of the fact that oral
disclosure was provided to the retail customer will trigger a record-
making obligation under paragraph (a)(35) of Rule 17a-3 and a
recordkeeping obligation under paragraph (e)(5) of Rule 17a-4 that may
impose additional compliance costs and burdens on broker-dealers.
---------------------------------------------------------------------------

    \1547\ The PRA burdens and costs arising from the requirement
that a record be made of all information provided to the retail
customer are accounted for in Regulation Best Interest and the
Relationship Summary Adopting Release. With respect to the
requirement that a record be made of all information from the retail
customer, we believe that Rule 17a-3(a)(35) will not impose any new
substantive burdens on broker-dealers. As discussed above, we
continue to believe that the obligation to exercise reasonable
diligence, care, and skill will not require a broker-dealer to
collect additional information from the retail customer beyond that
currently collected in the ordinary course of business even though a
broker-dealer's analysis of that information and any resulting
recommendations will need to adhere to the enhanced best interest
standard of Regulation Best Interest. See supra Section II.C.2.
---------------------------------------------------------------------------

i. Initial Costs and Burdens
    In the Proposing Release, we assumed that broker-dealers would
satisfy the record-making requirement of the proposed amendment to Rule
17a-3(a)(25) by amending an existing account disclosure document to
include the ``identity of each natural person who is an associated
person, if any, responsible for the account.'' We estimated that the
inclusion of this information in an account disclosure document would
require an approximate total aggregate initial burden of 3,808,000
hours, or approximately 1,333 hours per broker-dealer for the first
year after Regulation Best Interest is in effect.\1548\
---------------------------------------------------------------------------

    \1548\ These estimates were based on the following calculations:
(0.04 hours per customer account) x (95.2 million retail customer
accounts) = 3,808,000 aggregate burden hours. Conversely, (3,808,000
aggregate burden hours)/(2,857 broker-dealers) = 1,333 hours per
broker dealer for the first year after Regulation Best Interest is
in effect. See Proposing Release at 21673.
---------------------------------------------------------------------------

    As discussed above, we continue to believe that broker-dealers will
satisfy the record-making requirements of the amendment to Rule 17a-
3(a)(35) by amending an existing account disclosure document to include
the ``identity of each natural person who is an associated person, if
any, responsible for the account.'' We believe that the inclusion of
this information in an account disclosure document will require, on
average, approximately 1

hour per year for outside legal counsel at small broker-dealers, at an
updated average rate of $497/hour, for an average annual cost of $497
for each small broker-dealer to update an account disclosure document.
The projected aggregate initial cost for small broker-dealers is
therefore estimated to be $375,732 per year.\1549\ For broker-dealers
that are not small entities, we estimate that the initial burden will
be 2 hours for each broker-dealer: 1 hour for compliance personnel and
1 hour for legal personnel. We therefore estimate the aggregate initial
burden for broker-dealers that are not small entities to be
approximately 4,020 burden hours.\1550\ Finally, we estimate it will
require an additional 0.04 hours for the registered representative
responsible for the information (or other clerical personnel) to fill
out that information in the account disclosure document, for an
approximate total aggregate initial burden of 4,080,000 hours, or
approximately 1,475 hours per broker-dealer for the first year after
Regulation Best Interest is in effect.\1551\ Because we have already
included the costs and burdens associated with the creation of a record
to memorialize an oral disclosure, and the delivery of the amended
account disclosure document discussed above, they are not included in
this section of the analysis.\1552\
---------------------------------------------------------------------------

    \1549\ This estimate is based on the following calculation: (1
hour per small broker-dealer) x (756 small broker-dealers) x ($497/
hour) = $375,732 in aggregate costs per year.
    \1550\ This estimate is based on the following calculation: (2
burden hours per broker-dealer) x (2,010 large broker-dealers) =
4,020 aggregate burden hours per year.
    \1551\ These estimates are based on the following calculations:
(0.04 hours per customer account) x (102 million retail customer
accounts) = 4,080,000 aggregate burden hours. Conversely, (4,080,000
burden hours)/(2,766 broker-dealers) = 1,475 hours per broker-dealer
for the first year after Regulation Best Interest is in effect.
    \1552\ See supra Section IV.B.1.
---------------------------------------------------------------------------

    The total aggregate initial burden for broker-dealers is therefore
estimated at 4,084,020 hours,\1553\ and the total aggregate initial
cost is estimated at $375,732.\1554\
---------------------------------------------------------------------------

    \1553\ This estimate is based on the following calculation: (0
aggregate burden hours for small broker-dealers) + (4,020 burden
hours for large broker-dealers) + (4,080,000 burden hours for
personnel to fill out information in the account disclosure
document) = 4,080,000 initial burden hours.
    \1554\ This estimate is based on the following calculation:
($375,732 for small broker-dealer costs) + ($0 for large broker-
dealer costs) = ($375,732 in total aggregate initial costs).
---------------------------------------------------------------------------

ii. Ongoing Costs and Burdens
    We do not believe that the identity of the registered
representative responsible for the retail customer's account will
change. Accordingly, we continue to believe that there are no ongoing
costs and burdens associated with this record-making requirement of the
amendment to Rule 17a-3(a)(35).
    With respect to memorializing oral disclosures in cases where
broker-dealers choose to meet part of the Disclosure Obligation orally
under the circumstances outlined in Section II.C.1, Oral Disclosure or
Disclosure After a Recommendation, we estimate that this would take
place among 52% of a broker-dealer's retail customer accounts (and thus
52% of a registered representative's retail customer accounts)
annually.\1555\ We therefore estimate broker-dealers to incur a total
annual aggregate burden of 1.06 million hours, or 383.5 burden hours
per year per broker-dealer.\1556\
---------------------------------------------------------------------------

    \1555\ We believe (and our experience indicates) that broker-
dealers will use oral disclosure rarely, and primarily when making
disclosures regarding a change in capacity. We do not have reliable
data to determine the precise number of retail customers that have
both a brokerage and an advisory account with a dually registered
associated person. As indicated above, approximately 52% of
registered representatives were dually registered as investment
adviser representatives at the end of 2018. See supra footnote 945
and accompanying text. As a result, we have assumed for purposes of
this analysis that this will take place among 52% of all retail
customer accounts at broker-dealers annually. This estimate is
likely over inclusive, as it includes all retail customer accounts
at all broker-dealers (as opposed to only retail customer accounts
where the retail customer has both a brokerage and advisory account
with a dually registered financial professional), and under
inclusive, as it assumes that such an oral disclosure will happen
annually (as opposed to multiple times a year).
    \1556\ (52%) x (102 million retail customer accounts) x (0.02
hours for recording each oral disclosure relating to a retail
customer's account) = 1,060,800 aggregate burden hours. Conversely,
1,060,800 aggregate burden hours/2,766 broker-dealers = 383.5 burden
hours per broker-dealer per year.
---------------------------------------------------------------------------

b. Recordkeeping Obligation
    We are amending Rule 17a-4(e)(5) to require that broker-dealers
retain all records of the information collected from or provided to
each retail customer pursuant to Regulation Best Interest for at least
six years after the earlier of the date the account was closed or the
date on which the information was last replaced or updated. We assume
that, for purposes of this analysis, the following records would likely
be retained pursuant to amended Rule 17a-3(a)(35): (1) Existing account
disclosure documents; (2) comprehensive fee schedules; (3) disclosures
identifying material conflicts; and (4) memorialized oral disclosures
under the circumstances outlined in Section II.C.1, Oral Disclosure or
Disclosure After a Recommendation.\1557\
---------------------------------------------------------------------------

    \1557\ In the Proposing Release, we identified four records that
would likely need to be retained pursuant to amended Rule 17a-
3(a)(25) (now reflected as Rule 17a-3(a)(35)): (1) A standardized
Relationship Summary document; (2) existing account disclosure
documents; (3) a comprehensive fee schedule; and (4) disclosures
identifying material conflicts. However, in calculating the
estimated burden for broker-dealers to add new documents or modify
existing documents to the broker-dealer's existing retention system,
we erroneously assumed a broker-dealer would upload or file five
account documents, as opposed to the four account documents
identified in the Proposing Release. See Proposing Release at 21673-
21674. In addition, while the burden for broker-dealers to retain a
standardized relationship summary was included in the Regulation
Best Interest Proposing Release, it is excluded here because its
associated burden is reflected in the Relationship Summary Proposal
and Relationship Summary Adopting Release.
---------------------------------------------------------------------------

i. Initial Costs and Burdens
    We believe that, to reduce costs and for ease of compliance,
broker-dealers will utilize their existing recordkeeping systems in
order to retain the forgoing records made pursuant to Regulation Best
Interest, and as required to be kept under the amendment to Rule 17a-
4(e)(5). As noted above, broker-dealers currently are subject to
recordkeeping obligations pursuant to Rule 17a-4, which require, for
example, broker-dealers to ``preserve for a period of not less than six
years, the first two years in an easily accessible place, all records
required to be made pursuant to'' Rule 17a-3(a)(1), (a)(2), (a)(3),
(a)(5), (a)(21), (a)(22), and analogous records created pursuant to
paragraph 17a-3(f). Thus, for example, broker-dealers are already
required to maintain documents such as account blotters and ledgers for
six years.
    We continue to believe that broker-dealers will utilize their
existing recordkeeping systems to include any additional or amended
records required by Regulation Best Interest or pursuant to the
amendment to Rule 17a-4(e)(5), and would similarly utilize their
existing recordkeeping systems to account for any differences in the
retention period. Thus, where broker-dealers currently retain documents
on an electronic database to satisfy existing Rule 17a-4 or otherwise,
we continue to expect broker-dealers to maintain any additional
documents required by Regulation Best Interest or the amendment to Rule
17a-4(e)(5) by the same means. Likewise, where broker-dealers maintain
documents required by existing Rule 17a-4 by paper, we would expect
broker-dealers to continue to do so.
    Based on our belief that broker-dealers will rely on existing
infrastructures to satisfy the recordkeeping obligations of Regulation
Best Interest and the amendment to Rule 17-a(4)(e)(5), we believe the
burden for broker-dealers to add new documents or

modify existing documents to the broker-dealer's existing retention
system will be approximately 13.6 million burden hours for all broker-
dealers, assuming a broker-dealer will need to upload or file each of
the four account documents discussed above for each retail customer
account.\1558\ We do not believe there will be additional substantive
internal or external costs relating to the uploading or filing of the
documents. In addition, because we have already included the costs and
burdens associated with the delivery of the amended account opening
agreement and other documents above, we do not include them in this
section of the analysis.
---------------------------------------------------------------------------

    \1558\ This estimate is based on the following calculation: (4
documents per customer account) x (102 million retail customer
accounts) x (2 minutes per document)/60 minutes = 13,600,000
aggregate burden hours. As indicated above, the following records
would likely need to be retained: (1) Existing account disclosure
documents; (2) comprehensive fee schedules; (3) disclosures
identifying material conflicts; and (4) memorialized oral
disclosures under the circumstances outlined in Section II.C.1,
Disclosure Obligation, Oral Disclosure or Disclosure After a
Recommendation.
---------------------------------------------------------------------------

ii. Ongoing Costs and Burdens
    We estimate that the approximate ongoing burden associated with the
recordkeeping requirement of the amendment to Rule 17a-4(e)(5) is 4.46
million burden hours per year.\1559\ We do not believe that the ongoing
costs associated with ensuring compliance with the retention schedule
would change from the current costs of ensuring compliance with
existing Rule 17a-4 and as outlined above.
---------------------------------------------------------------------------

    \1559\ This estimate is based on the percentage of account
records we expect would be updated each year as described in Section
IV.B.1, supra, and the following calculation: (40% of fee schedules
x 102 million retail customer accounts) x (2 minutes per document) +
(40% of conflict disclosure forms x 102 million retail customer
accounts) x (2 minutes per document) + (20% of account opening
documents x 102 million retail customer accounts) x (2 minutes per
document) = 204 million minutes/60 minutes = 3.4 million aggregate
ongoing burden hours. In addition, with respect to ongoing
memorialization of the updated oral disclosures, we estimate that
this will take place among 52% of a broker-dealer's retail customer
accounts annually. We therefore estimate that broker-dealers will
incur an aggregate ongoing burden of 1.06 million hours per year
(calculated as follows: (52% of updated oral disclosures x 102
million retail customer accounts) x (1.2 minutes per document) =
63.6 million minutes/60 minutes = 1.06 million aggregate ongoing
burden hours); or 383.5 burden hours per broker-dealer (1.06 million
hours/2,766 broker-dealers = 383.5). 3.4 million burden hours per
year + 1.06 million burden hours per year = 4,460,000 total
aggregate ongoing burden hours per year.
---------------------------------------------------------------------------

V. Final Regulatory Flexibility Act Analysis

    The Commission has prepared this Final Regulatory Flexibility
Analysis (``FRFA'') in accordance with the provisions of the Regulatory
Flexibility Act (``RFA'') \1560\ relating to Regulation Best Interest.
An Initial Regulatory Flexibility Analysis (``IRFA'') was prepared in
accordance with the RFA and included in the Proposing Release.\1561\
---------------------------------------------------------------------------

    \1560\ 5 U.S.C. 603.
    \1561\ See Proposing Release, supra footnote 7, at Section VII.
---------------------------------------------------------------------------

A. Need for and Objectives of the Rule

    Broker-dealers play an important role in helping Americans organize
their financial lives, accumulate and manage retirement savings, and
invest toward other important long-term goals, such as buying a house
or funding a child's college education.
    As discussed in Section I, concerns exist regarding: (1) The
potential harm to retail customers resulting from broker-dealer
recommendations provided in the presence of conflicts of interest and
(2) the insufficiency of existing broker-dealer regulatory requirements
to address these conflicts when broker-dealers make recommendations to
retail customers. More specifically, there are concerns that existing
requirements do not require a broker-dealer's recommendations to be in
the retail customer's best interest.
    As a result, we are adopting Regulation Best Interest, which
creates an enhanced standard of conduct applicable to broker-dealers at
the time they recommend to a retail customer a securities transaction
or investment strategy involving securities. This includes
recommendations of account types and rollovers or transfers of assets
and also covers implicit hold recommendations, resulting from agreed-
upon account monitoring. When making a recommendation, a broker-dealer
must act in the retail customer's best interest and cannot place its
own interests ahead of the customer's interests. This General
Obligation is satisfied only if the broker-dealer complies with four
specified component obligations: (1) Disclosure Obligation, (2) Care
Obligation, (3) Conflict of Interest Obligation, and (4) Compliance
Obligation. In addition, the Commission is amending Rules 17a-3 and
17a-4 of the Exchange Act, which set forth minimum requirements with
respect to the records that broker-dealers must make, and how long
those records and other documents must be kept, respectively.
    First, as described in Section II.C.1, under the Disclosure
Obligation, before or at the time of making a recommendation, a broker-
dealer must disclose, in writing,\1562\ material facts about the scope
and terms of its relationship with the customer. This includes a
disclosure that the broker-dealer or associated person is acting in a
broker-dealer capacity; the material fees and costs the customer will
incur; and the type and scope of the services to be provided, including
any material limitations on the recommendations that could be made to
the retail customer. Moreover, the broker-dealer must disclose all
material facts relating to conflicts of interest associated with the
recommendation that might incline a broker-dealer to make a
recommendation that is not disinterested, including, for example,
proprietary products, payments from third parties, and compensation
arrangements.
---------------------------------------------------------------------------

    \1562\ As discussed above, there are circumstances where broker-
dealers and their associated persons may make oral disclosures or
written disclosures after the time of a recommendation under the
circumstances outlined in Section II.C.1, Disclosure Obligation,
Oral Disclosure or Disclosure After a Recommendation.
---------------------------------------------------------------------------

    Second, as described in Section II.C.2, under the Care Obligation,
a broker-dealer must exercise reasonable diligence, care, and skill
when making a recommendation to a retail customer. The broker-dealer
must understand potential risks, rewards, and costs associated with the
recommendation. The broker-dealer must then consider those risks,
rewards, and costs in light of the retail customer's investment profile
and have a reasonable basis to believe that the recommendation is in
the customer's best interest and does not place the broker-dealer's
interest ahead of the retail customer's interest. When recommending a
series of transactions, the broker-dealer must have a reasonable basis
to believe that the transactions taken together are not excessive, even
if each is in the retail customer's best interest when viewed in
isolation.
    Third, as described in Section II.C.3, under the Conflict of
Interest Obligation, a broker-dealer must establish, maintain, and
enforce reasonably designed written policies and procedures addressing
conflicts of interest associated with its recommendations to retail
customers. These policies and procedures must be reasonably designed to
identify all such conflicts and at a minimum disclose or eliminate
them. Additionally, the policies and procedures must be reasonably
designed to mitigate conflicts of interests that create an incentive
for an associated person of the broker-dealer to place its interests or
the

interest of the firm ahead of the retail customer's interest. Moreover,
when a broker-dealer places material limitations on recommendations
that may be made to a retail customer (e.g., offering only proprietary
or other limited range of products), the policies and procedures must
be reasonably designed to disclose the limitations and associated
conflicts and to prevent the limitations from causing the associated
person or broker-dealer to place the associated person's or broker-
dealer's interests ahead of the customer's interest. Finally, the
policies and procedures must be reasonably designed to identify and
eliminate sales contests, sales quotas, bonuses, and non-cash
compensation that are based on the sale of specific securities or
specific types of securities within a limited period of time.
    Fourth, as described in Section II.C.4, under the Compliance
Obligation, a broker-dealer must also establish, maintain, and enforce
written policies and procedures reasonably designed to achieve
compliance with Regulation Best Interest as a whole. Thus, a broker-
dealer's policies and procedures must address not only conflicts of
interest but also compliance with its Disclosure and Care Obligations
under Regulation Best Interest.
    The enhancements contained in Regulation Best Interest will improve
investor protection by enhancing the quality of broker-dealer
recommendations to retail customers and reducing the potential harm to
retail customers that may be caused by conflicts of interest.
Regulation Best Interest will complement the related rules,
interpretations, and guidance that the Commission is concurrently
issuing.\1563\ Individually and collectively, these actions are
designed to help retail customers better understand and compare the
services offered by broker-dealers and investment advisers and make an
informed choice of the relationship best suited to their needs and
circumstances, provide clarity with respect to the standards of conduct
applicable to investment advisers and broker-dealers, and foster
greater consistency in the level of protections provided by each
regime, particularly at the point in time that a recommendation is
made.
---------------------------------------------------------------------------

    \1563\ See Relationship Summary Adopting Release; Fiduciary
Interpretation; Solely Incidental Interpretation.
---------------------------------------------------------------------------

    All of these requirements are discussed in detail in Section II
above. The costs and burdens of these requirements on small broker-
dealers are discussed below as well as above in our Economic Analysis
and PRA Analysis, that discuss the costs and burdens on all broker-
dealers.

B. Significant Issues Raised by Public Comments

    The Commission is sensitive to the burdens that the new rule may
have on small entities. In the Proposing Release, we requested comment
on matters discussed in the IRFA. In particular, we sought comments on
the number of small entities that may be affected by proposed
Regulation Best Interest, and whether proposed Regulation Best Interest
would have an effect on small entities that had not been considered. We
requested that commenters describe the nature of any impact on small
entities and provide empirical data to support the extent of such
impact. We also requested comment on the proposed compliance burdens
and the effects these burdens would have on smaller entities.
    As discussed in the Economic Analysis and PRA Analysis above, we
received comments regarding the potential costs and burdens of the
proposal on broker-dealers, including those that are small
entities.\1564\ Additionally, the Commission received some comments
specifically addressing the costs to smaller broker-dealers.
---------------------------------------------------------------------------

    \1564\ See supra Sections III and IV.
---------------------------------------------------------------------------

    One commenter stated that for a small firm with $500,000 in net
capital, a compliance cost of $60,000 \1565\ could constitute 12% of
that net capital, making compliance with the rule burdensome for such
firms and potentially forcing many small firms to hire additional
compliance personnel.\1566\ Another commenter raised concerns that
replacing the term ``suitable'' with ``best interest'' could create
legal risk and cause smaller and mid-sized professional firms to leave
the market.\1567\ As noted above in Section III, we acknowledge that
the costs of the rule could be more burdensome for small firms and
discuss any corresponding competitive effects in Section III.D.1.\1568\
Further, as described above, we acknowledge the requests by commenters
for further clarity on what it means to ``act in the best interest'' of
the retail customer, and particularly what it means to make a
recommendation in a retail customer's ``best interest'' under the Care
Obligation. Consequently, in Section II.A, and in the detailed
discussion of each of the Disclosure, Care, Conflict of Interest, and
Compliance Obligations in Section II.C, we have provided further
clarity on how a broker-dealer can comply with Regulation Best
Interest. However, with respect to the comment concerning the term
``suitable,'' we are adopting a ``best interest'' standard as
proposed--which enhances the broker-dealer standard of conduct beyond
existing suitability obligations--in light of our goal to enhance
retail investor protection and decision making.
---------------------------------------------------------------------------

    \1565\ See NSCP Letter (``Consider the estimated $60,000 in
additional compliance costs referenced in the Release which would
represent 12% of net capital of a $500,000 firm.'')
    \1566\ See id (``Several small firms estimate that they incur
approximately $80,000 in compliance costs to meet basic ongoing
regulatory requirements. Notably, this amount does not include
expenses associated with new rules, regulatory changes, regulatory
exams or running a compliance department. In isolation, it may seem
that this single proposal by one regulatory agency would have
manageable marginal impact on costs. But in fact, it would be one of
many changes (and importantly, a major change) that smaller firms
must address. Many small firms do not have large Compliance
Departments adequate to shoulder these ever increasing regulatory
demands. In fact, many small firm Compliance Departments are
comprised of just one or two persons.''). See also, generally, NFIB
Letter (``America's small and independent businesses in the
financial industry cannot afford the army of lawyers and clerks
needed to comply with the welter of complex rules issued or proposed
by the U.S. Department of Labor (DOL) (Reference 1 above), the U.S.
Securities and Exchange Commission (SEC) (Reference 2 above), and
the several states to govern the duties of financial businesses
toward their retail customers.'')
    \1567\ See Iowa Insurance Commissioner Letter (``Striking
``suitability,'' and its history and legal precedence, will usher in
an age of legal and marketing confusion. Additionally, smaller and
mid-sized professional firms, to avoid the risks of this confusion
and the resulting litigation, will leave the market, and the larger
firms will remain, increasing market concentration. A decision to
replace the term ``suitable'' in the text of traditional suitability
rules with the phrase ``best interest'' will disrupt the market,
decrease competition, increase the price of services out of the
reach of thousands of middle class Americans, and significantly
reduce consumer options for selecting valuable professional
services.'') But see NAIFA Letter (``NAIFA supports a best interest
standard of conduct for securities-licensed firms and individuals,
and we appreciate the SEC's considerable efforts to establish such a
standard without imposing unduly prescriptive or burdensome
implementation or compliance requirements. The SEC's general
approach, we believe, will preserve choices for consumers at all
income levels and account sizes--and should not unnecessarily
increase costs for consumers or businesses.'')
    \1568\ See also infra Section V.E., noting that we believe that
Regulation Best Interest will result in multiple investor protection
benefits, and these benefits should apply to retail customers of
smaller entities as well as retail customers of large broker-
dealers.
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    Another commenter stated that costs for small broker-dealers could
be reduced if the Commission approved a standard disclosure, which
would add certainty and reduce costs for small firms and their
customers.\1569\ We

considered, as an alternative to the Disclosure Obligation, mandating a
standardized disclosure.\1570\ However, as described in Section II.C.1,
after careful consideration of the comments concerning the proposed
Disclosure Obligation, we have decided not to require any standard
written disclosures under Regulation Best Interest at this time. We
recognize the wide variety of business models and practices and we
continue to believe it is important to provide broker-dealers with
flexibility to enable them to better tailor disclosure and information
that their retail customers can understand and may be more likely to
read at relevant points in time, rather than, for example, mandating a
standardized all-inclusive (and likely lengthy) disclosure.
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    \1569\ See Chepucavage Letter (``Costs for the small bd's
however can be reduced with a commission approved standard
disclosure which would add certainty and ought to be considered
especially for the small investor. [. . .] A standard disclosure
document would also be useful for the small bd that cannot afford
the legal assistance needed to evaluate this 1,000 page proposal and
draft appropriate documents. [. . .] The Commission should therefore
reconsider the impact of its proposal on small investors and small
bd's with the assumption that retirement accounts are significantly
more important than regular brokerage accounts especially for small
and elderly investors. A standard disclosure for small firms would
reduce costs for the firms and their customers.'')
    \1570\ See supra Section III.E and infra Section V.E.
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    The vast majority of commenters supported the Commission's
rulemaking efforts to address the standards of conduct that apply to
broker-dealers when making recommendations, but nearly all commenters
suggested modifications to proposed Regulation Best Interest. These
suggestions touch on almost every aspect of the proposal, as summarized
in Section I.C above and as discussed in more detail, along with
explanations of modifications made in light of the comments, throughout
the release.

C. Small Entities Subject to the Rule

    For purposes of a Commission rulemaking in connection with the RFA,
a broker-dealer will be deemed a small entity if it: (i) Had total
capital (net worth plus subordinated liabilities) of less than $500,000
on the date in the prior fiscal year as of which its audited financial
statements were prepared pursuant to Rule 17a-5(d) under the Exchange
Act,\1571\ or, if not required to file such statements, had total
capital (net worth plus subordinated liabilities) of less than $500,000
on the last business day of the preceding fiscal year (or in the time
that it has been in business, if shorter); and (ii) is not affiliated
with any person (other than a natural person) that is not a small
business or small organization.\1572\
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    \1571\ 17 CFR 240.17a-5(d).
    \1572\ See 17 CFR 240.0-10(c).
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    As discussed in Section IV above, the Commission estimates that as
of December 31, 2018, approximately 2,766 retail broker-dealers will be
subject to Regulation Best Interest and the amendments to Rules 17a-3
and 17a-4.\1573\ Based on FOCUS Report data,\1574\ the Commission
estimated that as of December 31, 2018, approximately 756 of those
retail broker-dealers might be deemed small entities for purposes of
this analysis.\1575\ For purposes of this RFA analysis, we refer to
broker-dealers that might be deemed small entities under the RFA as
``small entities,'' and we continue to use the term ``broker-dealers''
to refer to broker-dealers generally, as the term is used elsewhere in
this release.\1576\ Of these 756 small entities, the Commission
estimates that 623 are standalone broker-dealers and 133 are dually
registered as investment advisers.\1577\
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    \1573\ As noted above, this estimate likely overstates the
number that would be impacted by Regulation Best Interest. See supra
Section III.C.1.a.
    \1574\ See supra footnote 1384.
    \1575\ See supra footnote 1386.
    \1576\ Consistent with the PRA, unless otherwise notes, we use
the terms ``registered representative'' and ``dually registered
representative of a broker-dealer'' herein.
    \1577\ These estimate are based on FOCUS Report Data, see supra
footnote 1384
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D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements

    The new requirements impose certain reporting and compliance
requirements on certain broker-dealers, including those that are small
entities. The new requirements are summarized in this FRFA (Section
V.A. above). All of these requirements are also discussed in detail, in
Section II above, and these requirements as well as the costs and
burdens on broker-dealers, including those that are small entities, are
discussed above in Sections III and IV (the Economic Analysis and PRA
Analysis) and below.
1. Disclosure Obligation
    The Disclosure Obligation under Regulation Best Interest requires a
broker-dealer or its associated persons, prior to or at the time of
recommending a securities transaction or strategy involving securities
to a retail customer, to provide the retail customer, in writing, full
and fair disclosure of: (1) All material facts relating to the scope
and terms of the relationship with the retail customer, including: (a)
That the broker, dealer, or such natural person is acting as a broker,
dealer, or an associated person of a broker or dealer with respect to
the recommendation, (b) the fees and costs that apply to the retail
customer's transactions, holdings, and accounts, and (c) the type and
scope of services provided to the retail customer, including any
material limitations on the securities or investment strategies
involving securities that may be recommended to the retail customer;
and (2) all material facts relating to conflicts of interest that are
associated with the recommendation. The estimated costs and burdens
incurred by small entities in relation to this Disclosure Obligation
are discussed in detail below.\1578\
---------------------------------------------------------------------------

    \1578\ For a discussion of additional costs and burdens as well
as monetized burdens, related to the Disclosure Obligation, see
supra Section III.C.2.b.
---------------------------------------------------------------------------

a. Obligation To Provide to the Retail Customer Full and Fair
Disclosure, in Writing, of All Material Facts Relating to the Scope and
Terms of the Relationship With the Retail Customer
    The Commission assumes for purposes of this analysis that small
entities would meet the obligation to disclose to the retail customer,
in writing, the material facts related to the scope and terms of the
relationship with the retail customer through a combination of delivery
of the Relationship Summary,\1579\ creating account disclosures to
include standardized language related to the capacity in which they are
acting and type and scope of services, and the development of fee
schedules.
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    \1579\ See Exchange Act Rule 17a-14 and Relationship Summary
Adopting Release, supra footnote 12.
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b. Estimated Costs and Burdens
    In addition to the costs described below, additional costs
associated with Regulation Best Interest are described above in Section
III.C.\1580\
---------------------------------------------------------------------------

    \1580\ See Sections III.C.2.b, III.C.3.b, III.C.4, III.C.5, and
III.C.6.
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(1) Disclosure of Capacity, Type and Scope of Services
    As explained above, standalone broker-dealers that are small
entities will satisfy the obligation to disclose the capacity in which
they acting through the delivery to the retail customer of the
Relationship Summary, and accordingly, we estimate zero burden hours
for standalone broker-dealers that are small entities to disclose the
capacity in which they are acting.
    We estimate that a dually registered firm that is a small entity
will incur an initial internal burden of 10 hours for in-house counsel
and in-house compliance to draft language regarding the capacity in
which it is acting for inclusion in the standardized account disclosure
that is delivered to the retail customer.\1581\ In addition, we
estimate

that dual-registrants that are small entities will incur an estimated
external cost of $4,970 for the assistance of outside counsel in the
preparation and review of standardized language regarding
capacity.\1582\ For the estimated 133 dually registered broker-dealers
that are small entities, we project an aggregate initial burden of
1,330 hours,\1583\ and $661,010 in aggregate initial costs for drafting
language regarding capacity.\1584\
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    \1581\ See supra footnotes 1395-1396.
    \1582\ See supra footnote 1397.
    \1583\ See supra footnote 1395. This estimate is based on the
following calculation: (133 dually registered retail firms that are
small entities) x (10 hours) = 1,330 initial aggregate burden
hours.) The professional skills associated with the estimated burden
hours are specified in Section IV above.
    \1584\ This estimate is based on the following calculation: (133
dually registered retail firms that are small entities) x ($4,970 in
external cost per firm) = $661,010 in aggregate initial costs.
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    Similarly, to comply with Regulation Best Interest, we believe that
small entities will draft standardized language for inclusion in the
account disclosure to provide the retail customer with more specific
information regarding the type and scope of services that they provide.
We estimate that a small entity will incur an internal initial burden
of 10 hours for in-house counsel and in-house compliance to draft this
standardized language.\1585\ In addition, a small entity will incur an
estimated external cost of $4,970 for the assistance of outside counsel
in the preparation and review of this standardized language.\1586\ For
the estimated 756 small entities,\1587\ we project an aggregate initial
burden of 7,560 hours,\1588\ and aggregate initial costs of $3.8
million for drafting language regarding type and scope of
services.\1589\
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    \1585\ See supra footnote 1402.
    \1586\ See supra footnote 1403.
    \1587\ See supra footnote 1385 and accompanying text.
    \1588\ See supra footnote 1405.
    \1589\ See supra footnote 1406.
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    We estimate that small entities will each incur approximately 0.02
burden hours \1590\ for delivery of the account disclosure
document.\1591\ Based on FOCUS data, we believe that the 756 small
entities have a total of 5,281 customer accounts, and that
approximately all of those accounts belong to retail customers.\1592\
We therefore estimate that small entities will have an aggregate
initial burden of 106 hours, or approximately 0.14 hours \1593\ per
small entity for the first year after Regulation Best Interest is in
effect for delivery of the account disclosure document.\1594\
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    \1590\ See supra footnote 1411.
    \1591\ See supra footnote 1412.
    \1592\ This estimate may overstate the number of retail customer
accounts at small entities and/or may overstate the number of
deliveries to be made due to the double-counting of deliveries to be
made by dual-registrants to a certain extent, and the fact that one
customer may own more than one account.
    \1593\ These estimates are based on the following calculations:
(0.02 hours per customer account x (5,281 retail customer accounts)
= 106 aggregate burden hours. Conversely, (106 hours) / (756 small
entities) = approximately 0.14 burden hours per small entity for the
first year after Regulation Best Interest is in effect.
    \1594\ See supra footnote 1415.
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    We therefore estimate a total initial aggregate burden for small
entities to develop and deliver to retail customers account disclosures
relating to the capacity in which they are acting and type and scope of
services of 7,666 burden hours.\1595\
---------------------------------------------------------------------------

    \1595\ This estimate is based on the following calculation:
(1,330 aggregate initial burden hours for dually registered broker-
dealers that are small entities) + (6,230 aggregate initial burden
hours for standalone broker-dealers that are small entities) + (106
aggregate initial burden hours for small entities to deliver the
account disclosures) = 7,666 total aggregate initial burden hours.
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    In terms of ongoing costs, we estimate that each dually registered
broker-dealer that is a small entity will incur approximately 5 burden
hours annually for in-house compliance and business-line personnel to
review changes in the dual-registrant's capacity, and another 2 burden
hours annually for in-house counsel to amend the account disclosure to
disclose material changes to the dual-registrant's capacity, for a
total of 7 burden hours. The estimated ongoing aggregate burden to
amend account disclosures of dual-registrants that are small entities
to reflect changes in capacity is therefore 931 hours per year.\1596\
---------------------------------------------------------------------------

    \1596\ This estimate is based on the following calculation: (7
burden hours per dually registered firm per year) x 133 dually
registered broker-dealers that are small entities) = 931 ongoing
aggregate burden hours per year.
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    With respect to small entities, we estimate an internal burden of 2
hours for in-house compliance and business-line personnel to review and
update changes in types or scope of services,\1597\ and another 2
burden hours annually for in-house counsel to amend the account
disclosure to disclose material changes to type and scope of services--
for a total of 4 burden hours per year. The estimated ongoing aggregate
burden for standalone broker-dealers that are small entities to amend
account disclosures to reflect changes in type and scope of services is
therefore 2,492 hours per year.\1598\
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    \1597\ As noted above, we estimate zero burden hours annually
for standalone broker-dealers that are small entities relating to
disclosure of capacity under the Disclosure Obligation. See supra
Section IV.B.1.a.ii.
    \1598\ This estimate is based on the following calculation: (4
burden hours per small entity per year) x (623 standalone broker-
dealers that are small entities) = 2,492 ongoing aggregate burden
hours per year.
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    With respect to delivery of the amended account agreements in the
event of material changes to the capacity disclosure or disclosure
related to type and scope of services, we estimate that this would take
place among 20% of a small entity's retail customer accounts annually.
We therefore estimate small entities to incur a total annual aggregate
burden of 21 hours, or 0.03 hours per small entity per year.\1599\
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    \1599\ (20%) x (5,281 retail customer accounts) x (0.02 hours
for delivery to each customer account) = 21 aggregate burden hours
per year. Conversely, 21 aggregate burden hours/756 small entities =
0.03 burden hours per small entity per year.
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    The total ongoing aggregate burden for small entities to review,
amend, and deliver updated account disclosures to reflect changes in
capacity, type and scope of services would be 3,444 burden hours per
year.\1600\
---------------------------------------------------------------------------

    \1600\ This estimate is based on the following calculation: (931
ongoing aggregate burden hours for dually registered broker-dealers
that are small entities) + (2,492 ongoing aggregate burden hours for
standalone broker-dealers that are small entities) + (21 ongoing
aggregate burden hours for delivery of amended account disclosures)
= 3,444 total ongoing aggregate burden hours per year.
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    The Commission acknowledges that the types of services and product
offerings vary greatly by broker-dealer, and therefore the costs or
burdens associated with updating the account disclosure might also
vary.
(2) Disclosure of Fees and Costs
    As stated above, while we anticipate that many small entities may
already create fee schedules, we believe that small entities will
initially spend 5 hours to internally create a new fee schedule in
consideration of the requirements of Regulation Best Interest. We
additionally estimate a one-time external cost of $2,485 for small