the services provided to them, investors are likely to respond
differently to the increased understanding. Such responses could be
transferring to a different financial firm or professional, hiring a
financial professional for the first time, not taking any action,
deciding to invest on their own without advice, or entirely abandoning
the brokerage or investment advisory market while moving their assets
to other products or markets (e.g., bank deposits or insurance
products). Given the number and complexity of assumptions that would be
required to be able to estimate how the relationship summary will
affect investors' understanding and their decision-making, the
Commission is not able to estimate the propensity of investors to
respond in one way or another.
---------------------------------------------------------------------------

    \852\ 15 U.S.C. 80b-2(c).
---------------------------------------------------------------------------

    In the economic analysis that follows, we first examine the current
regulatory and economic landscape to form a baseline for our analysis.
The economic effects of the adopted changes are discussed below.

B. Baseline

    This section discusses, as it relates to this rulemaking, the
current state of the broker-dealer and investment adviser markets, the
current regulatory environment, and the current state of retail
investor perceptions in the market.

1. Providers of Financial Services \853\
---------------------------------------------------------------------------

    \853\ In addition to broker-dealers and Commission-registered
investment advisers discussed below in the baseline, there are a
number of other entities, such as state registered investment
advisers, commercial banks and bank holding companies, and insurance
companies, which also provide financial advice services to retail
customers; however, because of unavailability of data, the
Commission is unable to estimate the number of some of those other
entities that are likely to provide financial advice to retail
customers. A number of broker-dealers (see infra footnote 862) have
non-securities businesses, such as insurance or tax services. As of
December 2018, there are approximately 17,300 state-registered
investment advisers. The Department of Labor in its Regulatory
Impact Analysis identifies approximately 398 life insurance
companies that could provide advice to retirement investors. See
U.S. Department of Labor, Regulating Advice Markets: Definition of
the Term `Fiduciary,' Conflicts of Interest, Retirement Investment
Advice: Regulatory Impact Analysis for Final Rule and Exemptions
(Apr. 2016), available at https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf (``Regulatory Impact Analysis'')
---------------------------------------------------------------------------

a. Broker-Dealers
    This rule will affect registrants in the market for broker-dealer
services, including dual registrants \854\ and broker-dealers offering
services to retail investors that are affiliated with an investment
adviser.\855\ The market for broker-dealer services encompasses a small
set of large and medium sized broker-dealers and thousands of smaller
broker-dealers competing for niche or regional segments of the
market.\856\ The market for broker-dealer services includes many
different markets for a variety of services, including, but not limited
to, managing orders for customers and routing them to various trading
venues; providing advice to customers that is in connection with and
reasonably related to their primary business of effecting securities
transactions; holding retail customers' funds and securities; handling
clearance and settlement of trades; intermediating between retail
customers and carrying/clearing brokers; dealing in corporate debt and
equities, government bonds, and municipal bonds, among others;
privately placing securities; and effecting transactions in mutual
funds that involve transferring funds directly to the issuer. Some
broker-dealers may specialize in just one narrowly defined service,
while others may provide a wide variety of services.
---------------------------------------------------------------------------

    \854\ Not all firms that are dually registered as an investment
adviser and a broker-dealer offer both brokerage and advisory
accounts to retail investors. For example, some dually registered
firms offer advisory accounts to retail investors but offer only
brokerage services, such as underwriting services, to institutional
clients. For the purposes of the relationship summary, we define a
dual registrant as a firm that is dually registered as a broker-
dealer and an investment adviser and offers services to retail
investors as both a broker-dealer and investment adviser. General
Instruction 11.C to Form CRS.
    \855\ Some broker-dealers may be affiliated with investment
advisers but are not dually registered. From Question 10 on Form BD,
2,098 (55.7%) broker-dealers report that directly or indirectly,
they control, are controlled by, or are under common control with an
entity that is engaged in the securities or investment advisory
business. Comparatively, 2,421 (18.2%) SEC-registered investment
advisers report an affiliate that is a broker-dealer in Section 7A
of Schedule D of Form ADV, including 1,878 SEC-registered investment
advisers that report an affiliate that is a registered broker-
dealer. Approximately 77% of total regulatory assets under
management of investment advisers are managed by these 2,421 SEC-
registered investment advisers.
    \856\ See Risk Management Controls for Brokers or Dealers with
Market Access, Securities Exchange Act Release No. 63241 (Nov. 3,
2010) [75 FR 69791 (Nov. 15, 2010)]. For simplification, we present
our analysis as if the market for broker-dealer services encompasses
one broad market with multiple segments, even though, in terms of
competition, it could also be discussed in terms of numerous
interrelated markets.
---------------------------------------------------------------------------

    As of December 2018, there were approximately 3,764 registered
broker-dealers with over 140 million customer accounts. In total, these
broker-dealers have over $4.3 trillion in total assets, which are total
broker-dealer assets as reported on Form X-17a-5.\857\ More than two-
thirds of all brokerage assets and close to one-third of all customer
accounts are held by the 17 largest broker-dealers, as shown in Table
1, Panel A.\858\ Of the broker-dealers registered with the Commission
as of December 2018, 359 broker-dealers are dually registered as
investment advisers.\859\ These firms hold over 90 million (63%)
customer accounts. Approximately 539 broker-dealers (14%) report at
least one type of non-securities business, including insurance,
retirement planning, mergers and acquisitions, and real estate, among
others.\860\ Approximately 73.5% of registered broker-dealers report
retail customer activity.\861\
---------------------------------------------------------------------------

    \857\ Assets are estimated by Total Assets (allowable and non-
allowable) from Part II of the FOCUS filings (Form X-17A-5 Part II,
available at https://www.sec.gov/files/formx-17a-5_2.pdf) and
correspond to balance sheet total assets for the broker-dealer. The
Commission does not have an estimate of the total amount of customer
assets for broker-dealers. We estimate broker-dealer size from the
total balance sheet assets as described above.
    \858\ Approximately $4.27 trillion of total assets of broker-
dealers (99%) are at firms with total assets in excess of $1
billion. Of the 39 dually registered broker-dealers with total
assets in excess of $1 billion, total assets for these dually
registered broker-dealers are $2.32 trillion (54%) of aggregate
broker-dealer assets. Of the remaining 99 broker-dealers with total
assets in excess of $1 billion that are not dually registered, 91
have affiliated investment advisers.
    \859\ Because this number does not include the number of broker-
dealers who are also registered as state investment advisers, the
number undercounts the full number of broker-dealers that operate in
both capacities.
    \860\ We examined Form BD filings to identify broker-dealers
reporting non-securities business. For the 539 broker-dealers
reporting such business, staff analyzed the narrative descriptions
of these businesses on Form BD, and identified the most common types
of businesses: Insurance (202), management/financial/other
consulting (99), advisory/retirement planning (71), mergers and
acquisitions (70), foreign exchange/swaps/other derivatives (28),
real estate/property management (30), tax services (15), and other
(146). Note that a broker-dealer may have more than one line of non-
securities business.
    \861\ The value of customer accounts is not available from FOCUS
data for broker-dealers. Therefore, to obtain estimates of firm size
for broker-dealers, we rely on the value of broker-dealers' total
assets as obtained from FOCUS reports. Retail sales activity is
identified from Form BR, which categorizes retail activity broadly
(by marking the ``sales'' box) or narrowly (by marking the
``retail'' or ``institutional'' boxes as types of sales activity).
We use the broad definition of sales as we preliminarily believe
that many firms will just mark ``sales'' if they have both retail
and institutional activity. However, this may capture some broker-
dealers that do not have retail activity, although we are unable to
estimate that frequency.
---------------------------------------------------------------------------

    Panel B of Table 1 is limited to the broker-dealers that report
some retail investor activity. As of December 2018, there are
approximately 2,766 broker-dealers that served retail investors, with
over $3.8 trillion in total assets (89% of total broker-dealer assets)
and almost 139 million (97%) customer accounts.\862\ Of those broker-
dealers serving retail investors, 318 are dually registered as
investment advisers.\863\
---------------------------------------------------------------------------

    \862\ Total assets and customer accounts for broker-dealers that
serve retail customers also include institutional accounts. Data
available from Form BD and FOCUS data is not sufficiently granular
to identify the percentage of retail and institutional accounts at
firms.
    \863\ Of the 31 dually registered firms in the group of retail
broker-dealers with total assets in excess of $500 million, total
assets for these dually registered firms are nearly $2.32 trillion
(60%) of aggregate retail broker-dealer assets (Table 1, Panel B).
Of the remaining 81 retail broker-dealers with total assets in
excess of $500 million that are not dually registered, 69 have
affiliated investment advisers.

                         Table 1--Panel A: Registered Broker-Dealers as of December 2018
                          [Cumulative broker-dealer total assets and customer accounts]
----------------------------------------------------------------------------------------------------------------
                                                                   Number of                        Cumulative
                                                 Total number        dually         Cumulative       number of
     Size of broker-dealer (total assets)         of broker-       registered      total assets      customer
                                                    dealers      broker-dealers     (billion)     accounts \864\
----------------------------------------------------------------------------------------------------------------
>$50 billion..................................              17               10           $2,879      40,550,200
$1 billion to $50 billion.....................             114               22            1,363      96,037,591
$500 million to $1 billion....................              35                7               23         397,814
$100 million to $500 million..................             105               19               23       1,603,818
$10 million to $100 million...................             490              101               17       4,277,432
$1 million to $10 million.....................           1,021              130              3.6         460,748
<$1 million...................................           1,982               70              0.5           5,675
                                               -----------------------------------------------------------------
    Total \865\ \866\.........................           3,764              359            4,309     143,333,278
----------------------------------------------------------------------------------------------------------------

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

    \864\ Customer Accounts includes both broker-dealer and
investment adviser accounts for dually-registered firms.
    \865\ The data is obtained from FOCUS filings as of December
2018. Note that there may be a double-counting of customer accounts
among, in particular, the larger broker-dealers, as they may report
introducing broker-dealer accounts as well accounts in their role as
clearing broker-dealers.
    \866\ In addition to the approximately 143 million individual
accounts at broker-dealers, there are approximately 302,000 omnibus
accounts (0.2% of total accounts at broker-dealers), with total
assets of $32.1 billion, across all 3,764 broker-dealers, of which
approximately 99% are held at broker-dealers with greater than $1
billion in total assets. See also infra footnote 872. Omnibus
accounts reported in FOCUS data are the accounts of non-carrying
broker-dealers with carrying broker-dealers. These accounts may have
securities of multiple customers (of the non-carrying firm), or
securities that are proprietary assets of the non-carrying broker-
dealer. We are unable to determine from the data available how many
customer accounts non-carrying broker-dealers may have. The data
does not allow the Commission to parse the total assets in those
accounts to determine to whom such assets belong. Therefore, our
estimate may be under inclusive of all customer accounts held at
broker-dealers.

                     Table 1--Panel B: Registered Retail Broker-Dealers as of December 2018
                          [Cumulative broker-dealer total assets and customer accounts]
----------------------------------------------------------------------------------------------------------------
                                                                   Number of
                                                 Total number        dually         Cumulative      Cumulative
     Size of broker-dealer (total assets)         of retail-       registered      total assets      number of
                                                facing broker-   retail-facing      (billion)        customer
                                                    dealers      broker-dealers                      accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion..................................              16                8           $2,806      40,545,792
$1 billion to $50 billion.....................              75               18              990      91,991,118
$500 million to $1 billion....................              21                5               13         365,632
$100 million to $500 million..................              84               16               18       1,603,818
$10 million to $100 million...................             378               91               14       3,762,620
$1 million to $10 million.....................             783              120              2.8         450,132
<$1 million...................................           1,409               60              0.4           5,672
                                               -----------------------------------------------------------------
    Total BDs \867\...........................           2,766              318            3,844     138,724,784
----------------------------------------------------------------------------------------------------------------

    Table \868\ 2 reports information on brokerage commissions,\869\
fees, and selling concessions from the fourth quarter of 2018 for all
broker-dealers, including dually-registered firms.\870\ We observe
significant variation in sources of revenues for broker-dealers, with
large broker-dealers, on average, generating substantially higher
levels of commission and fee revenues than smaller broker-dealers. On
average, broker-dealers, including those that are dually registered as
investment advisers, earn about $5.1 million per quarter in revenue
from commissions and nearly four times that amount in fees, although
the Commission notes that fees encompass a variety of fees.\871\ The
level of revenues earned from broker-dealers for commissions and fees
increases with broker-dealer size, but also tends to be more heavily
weighted toward commissions for broker-dealers with less than $10
million in assets and is weighted more heavily toward fees for broker-
dealers with assets in excess of $10 million. For example, for the 114

broker-dealers with assets between $1 billion and $50 billion, average
revenues from commissions are approximately $45 million, while average
revenues from fees are approximately $225 million.\872\
---------------------------------------------------------------------------

    \867\ Total Broker-dealers includes all retail-facing broker-
dealers, including those dual registrants that have both retail-
facing broker-dealers and retail-facing investment advisers.
    \868\ See infra footnote 1397 for how broker-dealers who engage
in retail sales activity are identified. In addition to the 318
retail-facing dually registered broker-dealers, we estimate 30
broker-dealers that are registered as investment advisers but do not
have a retail-facing investment advisory business.
    \869\ Mark-ups or mark-downs are not included as part of the
brokerage commission revenue in FOCUS data; instead, they are
included in Net Gains or Losses on Principal Trades, but are not
uniquely identified as a separate revenue category.
    \870\ Source: FOCUS data.
    \871\ Fees, as detailed in the FOCUS data, include fees for
account supervision, investment advisory services, and
administrative services. Beyond the broad classifications of fee
types included in fee revenue, we are unable to determine whether
fees such as 12b-1 fees, sub-accounting, or other such service fees
(e.g., payments by an investment company for personal services and/
or maintenance of shareholder accounts) are included. The data
covers both broker-dealers and dually registered firms. FINRA's
Supplemental Statement of Income, Line 13975 (Account Supervision
and Investment Advisory Services) denotes that fees earned for
account supervision are those fees charged by the firm for providing
investment advisory services where there is no fee charged for trade
execution. Investment Advisory Services generally encompass
investment advisory work and execution of client transactions, such
as wrap arrangements. These fees also include fees charged by
broker-dealers that are also registered with the Commodity Futures
Trading Commission (``CFTC''), but do not include fees earned from
affiliated entities (Item A of question 9 under Revenue in the
Supplemental Statement of Income).
    \872\ A rough estimate of total fees in this size category would
be 114 broker-dealers with assets between $1 billion and $50 billion
multiplied by the average fee revenue of $225 million, or $25.65
billion in total fees. Divided by the number of customer accounts,
not all of which may pay fees, in this size category (96,037,591),
each account would be charged on average approximately $267 in fees
per quarter, or $1,068 per year.
---------------------------------------------------------------------------

    In addition to revenue generated from commissions and fees, broker-
dealers may also receive revenues from other sources, including margin
interest, underwriting, research services, and third-party selling
concessions, such as from sales of investment company (``IC'') shares.
As shown in Table 2, Panel A, these selling concessions are generally a
smaller fraction of broker-dealer revenues than either commissions or
fees, except for broker-dealers with total assets between $10 million
and $100 million. For these broker-dealers, revenue from third-party
selling concessions is the largest category of revenues and constitutes
approximately 42% of total revenues earned by these firms.
    Table 2, Panel B below provides aggregate revenues by revenue type
(commissions, fees, or selling concessions from sales of IC shares) for
broker-dealers delineated by whether the broker-dealer is also a
dually-registered firm. Broker-dealers dually registered as investment
advisers have a significantly larger fraction of their revenues from
fees other than commissions or selling concessions, whereas commissions
are approximately 42% of the revenues of broker-dealers that are not
dually registered.

               Table 2--Panel A: Average Broker-Dealer Revenues From Revenue Generating Activities
----------------------------------------------------------------------------------------------------------------
                                                     Number of                     Fees 873 874     Sales of IC
      Size of broker-dealer in total assets       broker-dealers    Commissions                       shares
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................              17    $170,336,258    $414,300,268     $23,386,192
$1 billion-$50 billion..........................             114      45,203,225     225,063,257      53,671,602
500 million-1 billion...........................              35       8,768,547      30,141,270       5,481,248
100 million-500 million.........................             105      12,801,889      33,726,336      16,610,013
10 million-100 million..........................             490       3,428,843       8,950,892       9,092,971
1 million-10 million............................           1,021         996,130       1,037,825         652,905
<1 million......................................           1,982         197,907         269,459          85,219
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
Average of All Broker-Dealers...................           3,764       5,092,808      21,948,551       4,368,823
----------------------------------------------------------------------------------------------------------------

Table 2--Panel B: Aggregate Total Revenues From Revenue Generating Activities for Broker-Dealers Based on Dually-
                                                Registered Status
----------------------------------------------------------------------------------------------------------------
                                                                                Sales of IC
               Broker-dealer type                    Number of      Commissions     Fees \875\        shares
                                                  broker-dealers     (billion)       (billion)       (billion)
----------------------------------------------------------------------------------------------------------------
Dually Registered as IAs........................             359           $4.52          $17.54           $2.63
Broker-Dealers..................................           3,405            4.16            3.25            2.57

    All.........................................           3,764            8.68           20.79            5.20
----------------------------------------------------------------------------------------------------------------

    As shown in Table 3, based on responses to Form BD, broker-dealers
most commonly provided business lines include private placements of
securities (62.7% of broker-dealers); retail sales of mutual funds
(55.4%); acting as a broker or dealer retailing corporate equity
securities over the counter (52.0%); acting as a broker or dealer
retailing corporate debt securities (47.2%); acting as a broker or
dealer selling variable contracts, such as life insurance or annuities
(41.0%); acting as a broker of municipal debt/bonds or U.S. government
securities (39.8% and 37.4%, respectively); acting as an underwriter or
selling group participant of corporate securities (31.2%); and
investment advisory services (26.4%); among others.\876\
---------------------------------------------------------------------------

    \873\ Fees, as detailed in the FOCUS data, include fees for
account supervision, investment advisory services, and
administrative services. The data covers both broker-dealers and
dually registered firms.
    \874\The data is obtained from December 2018 FOCUS reports and
averaged across size groups.
    \875\ See id.
    \876\ Form BD requires applicants to identify the types of
business engaged in (or to be engaged in) that accounts for 1% or
more of the applicant's annual revenue from the securities or
investment advisory business. Table 3 provides an overview of the
types of businesses listed on Form BD, as well as the frequency of
participation in those businesses by registered broker-dealers as of
December 2018.

 Table 3--Lines of Business at Retail Broker-Dealers as of December 2018
------------------------------------------------------------------------
                                             Number of      Percent of
                                              broker-         broker-
            Line of business                  dealers         dealers
                                              (total)         (total)
------------------------------------------------------------------------
Private Placements of Securities........           1,735            62.7
Mutual Fund Retailer....................           1,533            55.4
Broker or Dealer Retailing:
    Corporate Equity Securities OTC.....           1,438            52.0
    Corporate Debt Securities...........           1,306            47.2

    Variable Contracts..................           1,132            40.9
Municipal Debt/Bonds--Broker............           1,101            39.8
U.S. Government Securities Broker.......           1,035            37.4
Put and Call Broker or Dealer or Options             993            35.9
 Writer.................................
Underwriter or Selling Group                         862            31.2
 Participant--Corporate Securities......
Non-Exchange Member Arranging for                    785            28.4
 Transactions in Listed Securities by
 Exchange Member........................
Investment Advisory Services............             730            26.4
Broker or Dealer Selling Tax Shelters or             619            22.4
 Limited Partnerships--Primary Market...
Trading Securities for Own Account......             614            22.2
Municipal Debt/Bonds--Dealer............             475            17.2
U.S. Government Securities--Dealer......             339            12.3
Solicitor of Time Deposits in a                      308            11.1
 Financial Institution..................
Underwriter--Mutual Funds...............             237             8.6
Broker or Dealer Selling Interests in                216             7.8
 Mortgages or Other Receivables.........
Broker or Dealer Selling Oil and Gas                 207             7.5
 Interests..............................
Broker or Dealer Making Inter-Dealer                 207             7.5
 Markets in Corporate Securities OTC....
Broker or Dealer Involved in Networking,             197             7.1
 Kiosk, or Similar Arrangements (Banks,
 Savings Banks, Credit Unions)..........
Internet and Online Trading Accounts....             192             6.9
Exchange Member Engaged in Exchange                  171             6.2
 Commission Business Other than Floor
 Activities.............................
Broker or Dealer Selling Tax Shelters or             164             5.9
 Limited Partnerships--Secondary Market.
Commodities.............................             162             5.9
Executing Broker........................             107             3.9
Day Trading Accounts....................              89             3.2
Broker or Dealer Involved in Networking,              88             3.2
 Kiosk, or Similar Arrangements
 (Insurance Company or Agency)..........
Real Estate Syndicator..................              94             3.4
Broker or Dealer Selling Securities of                71              26
 Non-Profit Organizations...............
Exchange Member Engaged in Floor                      61             2.2
 Activities.............................
Broker or Dealer Selling Securities of                43             1.6
 Only One Issuer or Associate Issuers...
Prime Broker............................              21             0.8
Crowdfunding FINRA Rule 4518(a).........              21             0.8
Clearing Broker in a Prime Broker.......              14             0.5
Funding Portal..........................               8             0.3
Crowdfunding FINRA Rule 4518(b).........               5             0.2
Number of Retail-Facing Broker-Dealers..           2,766
------------------------------------------------------------------------

(1) Disclosures for Broker-Dealers

    As discussed above, broker-dealers register with and report
information, including about their business, affiliates, and
disciplinary history, to the Commission, Self-Regulatory Organizations
(``SROs''), and other jurisdictions through Form BD.\877\ Form BD
requires information about the background of the applicant, its
principals, controlling persons, and employees, as well as information
about the type of business the broker-dealer proposes to engage in and
all control affiliates engaged in the securities or investment advisory
business.\878\ Broker-dealers report whether a broker-dealer or any of
its control affiliates have been subject to criminal prosecutions,
regulatory actions, or civil actions in connection with any investment-
related activity, as well as certain financial matters.\879\ Once a
broker-dealer is registered, it must keep its Form BD current by
amending it promptly when the information is or becomes inaccurate for
any reason.\880\ In addition, firms report similar information and
additional information to FINRA pursuant to FINRA Rule 4530.\881\
---------------------------------------------------------------------------

    \877\ See Proposing Release, supra footnote 5, at Section
IV.A.1.i.; see also generally Form BD.
    \878\ See generally Form BD.
    \879\ See Item 11 and Disclosure Reporting Pages of Form BD.
    \880\ See Exchange Act rule 15b3-1(a).
    \881\ See Proposing Release, supra footnote 5, at Section
II.B.7. Pursuant to FINRA Rule 4530, broker-dealers are required to
disclose certain information to FINRA that is not reported on Form
BD (e.g., customer complaints and arbitrations).
---------------------------------------------------------------------------

    A significant amount of information concerning broker-dealers and
their associated natural persons, including information from Form BD,
Form BDW, and Forms U4, U5, and U6, is publicly available through
FINRA's BrokerCheck system.\882\ This information includes violations
of and claims of violations of the securities and other financial laws
by broker-dealers and their financial professionals; criminal or civil
litigation, regulatory actions, arbitration, or customer complaints
against broker-dealers and their financial professionals; and the
employment history and licensing information of financial professionals
associated with broker-dealers, among other things.\883\
---------------------------------------------------------------------------

    \882\ FINRA Rule 8312 governs the information FINRA releases to
the public via BrokerCheck. See Proposing Release, supra footnote 5,
at n.280.
    \883\ See Proposing Release, supra footnote 5, at Section
II.B.7.

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

    Broker-dealers are subject to other disclosure obligations under
the federal securities laws and SRO rules. For instance, under existing
antifraud provisions of the Exchange Act, a broker-dealer has a duty to
disclose material information to its customers conditional on the scope
of the relationship with the customer.\884\ Disclosure has also been a
feature of other regulatory efforts related to financial services,
including certain FINRA rules.\885\
---------------------------------------------------------------------------

    \884\ A broker-dealer also may be liable if it does not disclose
``material adverse facts of which it is aware.'' See, e.g., Chasins
v. Smith, Barney & Co., 438 F.2d 1167, 1172 (1970); SEC v. Hasho,
784 F. Supp. 1059, 1110 (S.D.N.Y. 1992); In the Matter of RichMark
Capital Corp., Exchange Act Release No. 48758 (Nov. 7, 2003) (``When
a securities dealer recommends stock to a customer, it is not only
obligated to avoid affirmative misstatements, but also must disclose
material adverse facts of which it is aware. That includes
disclosure of ``adverse interests'' such as ``economic self-
interest'' that could have influenced its recommendation.'')
(citations omitted).
    \885\ See FINRA Requests Comment on Concept Proposal to Require
a Disclosure Statement for Retail Investors at or Before Commencing
a Business Relationship, FINRA Regulatory Notice 10-54 (Oct. 2010).
Generally, all registered broker-dealers that deal with the public
must become members of FINRA, a registered national securities
association, and may choose to become exchange members. See section
15(b)(8) of the Exchange Act and Exchange Act rule 15b9-1. FINRA is
the sole national securities association registered with the SEC
under section 15A of the Exchange Act. Accordingly, for purposes of
discussing a broker-dealer's regulatory requirements when providing
advice, we focus on FINRA's regulation, examination, and enforcement
with respect to member broker-dealers. FINRA disclosure rules
include, but are not limited to, FINRA Rules 2210(d)(2)
(communications with the public), 2260 (disclosures), 2230 (customer
account statements and confirmations), and 2270 (day-trading risk
disclosure statement).
---------------------------------------------------------------------------

b. Investment Advisers
    As discussed above, SEC-registered investment advisers that offer
services to retail investors will be subject to the final rule. In
addition, although not required to comply with the final rule, state-
registered investment advisers will also be affected, because the final
rule will impact the competitive landscape in the market for the
provision of financial advice.\886\ This section first discusses SEC-
registered investment advisers, followed by a discussion of state-
registered investment advisers.
---------------------------------------------------------------------------

    \886\ In addition to SEC-registered investment advisers, which
are the focus of this section, this rule could also affect banks,
trust companies, insurance companies, and other providers of
financial advice.
---------------------------------------------------------------------------

    As of December 2018, there are approximately 13,300 investment
advisers registered with the Commission. The majority of SEC-registered
investment advisers report that they provide portfolio management
services for individuals and small businesses.\887\
---------------------------------------------------------------------------

    \887\ Of the approximately 13,300 SEC-registered investment
advisers, 8,410 (63.24%) report in Item 5.G.(2) of Form ADV that
they provide portfolio management services for individuals and/or
small businesses. In addition, there are approximately 17,300 state-
registered investment advisers, of which 125 are also registered
with the Commission. Approximately 13,900 state-registered
investment advisers are retail facing (see Item 5.D. of Form ADV).
---------------------------------------------------------------------------

    Of all SEC-registered investment advisers, 359 identify themselves
as dually registered broker-dealers.\888\ Further, 2,421 investment
advisers (18%) report an affiliate that is a broker-dealer, including
1,878 investment advisers (14%) that report an SEC-registered broker-
dealer affiliate.\889\ As shown in Panel A of Table 4 below, in
aggregate, investment advisers have over $84 trillion in assets under
management (``AUM''). A substantial percentage of AUM at investment
advisers is held by institutional clients, such as investment
companies, pooled investment vehicles, and pension or profit sharing
plans; therefore, the total number of accounts for investment advisers
is only 29% of the number of customer accounts for broker-dealers.
---------------------------------------------------------------------------

    \888\ See supra footnote 861 and accompanying text.
    \889\ Item 7.A.1. of Form ADV.
---------------------------------------------------------------------------

    Based on staff analysis of Form ADV data as of December 2018,
approximately 62% of registered investment advisers (8,235) have some
portion of their business dedicated to retail investors, including both
high net worth and non-high net worth individual clients,\890\ as shown
in Panel B of Table 4.\891\ In total, these firms have approximately
$41.4 trillion of assets under management.\892\ Approximately 8,200
registered investment advisers (61%) serve over 32 million non-high net
worth individual clients and have approximately $4.8 trillion in assets
under management, while approximately 8,000 registered investment
advisers (60%) serve approximately 4.8 million high net worth
individual clients with $6.15 trillion in assets under management.\893\
---------------------------------------------------------------------------

    \890\ Data on individual clients obtained from Form ADV may not
necessarily correspond to data on ``retail customers'' as defined in
this rule because the data in Form ADV regarding individual clients
does not involve any test of use for personal, family, or household
purposes.
    \891\ We use the responses to Items 5.D.(a)(1), 5.D.(a)(3),
5.D.(b)(1), and 5.D.(b)(3) of Part 1A of Form ADV. If at least one
of these responses was filled out as greater than 0, the firm is
considered as providing business to retail investors. Part 1A of
Form ADV.
    \892\ The aggregate AUM reported for these investment advisers
that have retail investors includes both retail AUM as well as any
institutional AUM also held at these advisers.
    \893\ Estimates are based on IARD system data as of December 31,
2018. The AUM reported here is specifically that of those non-high
net worth clients. Of the 8,235 investment advisers serving retail
investors, 318 are also dually registered as broker-dealers.

                   Table 4--Panel A: Registered Investment Advisers (RIAs) as of December 2018
                           [Cumulative RIA Assets Under Management (AUM) and Accounts]
----------------------------------------------------------------------------------------------------------------
                                                                     Number of
                                                                      dually      Cumulative AUM    Cumulative
        Size of investment adviser (AUM)          Number of RIAs    registered       (billion)       number of
                                                                       RIAs                          accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion....................................             270              15         $59,264      20,655,756
$1 billion to $50 billion.......................           3,453             121          22,749      13,304,154
$500 million to $1 billion......................           1,635              47           1,151       1,413,099
$100 million to $500 million....................           5,927             119           1,397       5,135,070
$10 million to $100 million.....................           1,070              24              59         310,031
$1 million to $10 million.......................             162               3             0.8          69,664
<$1 million.....................................             782              30            0.02          13,976
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Total.......................................          13,299             359          84,621      41,081,750
----------------------------------------------------------------------------------------------------------------

               Table 4--Panel B: Retail Registered Investment Advisers (RIAs) as of December 2018
                           [Cumulative RIA Assets Under Management (AUM) and accounts]
----------------------------------------------------------------------------------------------------------------
                                                                   Number of                        Cumulative
       Size of investment adviser (AUM)         Number of RIAs       dually       Cumulative AUM     number of
                                                                registered RIAs     (billion)        accounts
----------------------------------------------------------------------------------------------------------------
>$50 billion..................................             119               14          $30,291      20,592,326
$1 billion to $50 billion.....................           1,614              111            9,570      13,224,188
$500 million to $1 billion....................           1,007               44              700       1,392,842
$100 million to $500 million..................           4,548              113            1,026       5,287,584
$10 million to $100 million...................             706               23               40         308,285
$1 million to $10 million.....................             102                3              0.5          69,534
<$1 million...................................             169               10             0.02          13,946
                                               -----------------------------------------------------------------
    Total RIAs \894\..........................           8,235              318           41,434      40,887,325
----------------------------------------------------------------------------------------------------------------

    In addition to SEC-registered investment advisers, other investment
advisers are registered with state regulators.\895\ As of December
2018, there are 17,268 state-registered investment advisers,\896\ of
which 125 are also registered with the Commission. Of the state-
registered investment advisers, 204 are dually registered as broker-
dealers, while approximately 4.6% (786) report a broker-dealer
affiliate. In aggregate, state-registered investment advisers have
approximately $334 billion in AUM. Eighty-two percent of state-
registered investment advisers report that they provide portfolio
management services for individuals and small businesses, compared to
just 63% for Commission-registered investment advisers.
---------------------------------------------------------------------------

    \894\ Total RIAs (1) includes all retail-facing investment
advisers, including those dual registrants that have retail-facing
investment advisers and retail-facing broker-dealers.
    \895\ Item 2.A. of Part 1A of Form ADV and the Advisers Act
rules 203A-1 and 203A-2 require an investment adviser to register
with the SEC if it: (i) Is a large adviser that has $100 million or
more of regulatory assets under management (or $90 million or more
if an adviser is filing its most recent annual updating amendment
and is already registered with the SEC); (ii) is a mid-sized adviser
that does not meet the criteria for state registration or is not
subject to examination; (iii) meets the requirements for one or more
of the revised exemptive rules under section 203A; (iv) is an
adviser (or subadviser) to a registered investment company; (v) is
an adviser to a business development company and has at least $25
million of regulatory assets under management; or (vi) receives an
order permitting the adviser to register with the Commission.
Although the statutory threshold is $100 million, the SEC raised the
threshold to $110 million to provide a buffer for mid-sized advisers
with assets under management close to $100 million to determine
whether and when to switch between state and Commission
registration. Advisers Act rule 203A-1(a).
    \896\ There are 70 investment advisers with latest reported
regulatory assets under management in excess of $110 million but
that are not listed as registered with the SEC. None of these 70
investment advisers has exempted status with the Commission. For the
purposes of this rulemaking, these are considered potentially
erroneous submissions
---------------------------------------------------------------------------

    Approximately 81% of state-registered investment advisers (13,927)
have some portion of their business dedicated to retail investors,\897\
and in aggregate, these firms have approximately $324 billion in
AUM.\898\ Approximately 13,910 (81%) state-registered advisers serve 14
million non-high net worth retail clients and have approximately $137
billion in AUM, while 11,497 (67%) state-registered advisers serve
approximately 170,000 high net worth retail clients with approximately
$169 billion in AUM.\899\
---------------------------------------------------------------------------

    \897\ We use the responses to Items 5.D.(a)(1), 5.D.(a)(3),
5.D.(b)(1), and 5.D.(b)(3) of Part 1A. If at least one of these
responses was filled out as greater than 0, the firm is considered
as providing business to retail investors. Part 1A of Form ADV.
    \898\ The aggregate AUM reported for these investment advisers
that have retail investors includes both retail AUM as well as any
institutional AUM also held at these advisers.
    \899\ Estimates are based on IARD system data as of February 10,
2018. The AUM reported here is specifically that of those non-high
net worth investors. Of the 13,927 state-registered investment
advisers serving retail investors, 134 may also be dually registered
as broker-dealers.
---------------------------------------------------------------------------

    Table 5 details the compensation structures employed by
approximately 13,000 SEC-registered investment advisers. Approximately
96% are compensated through a fee-based arrangement, where a percentage
of assets under management are remitted to the investment adviser from
the investor for advisory services. As shown in the table below, most
investment advisers rely on a combination of different compensation
types, in addition to fee-based compensation, including fixed fees,
hourly charges, and performance based fees. Less than 4% of investment
advisers charge commissions \900\ to their investors.
---------------------------------------------------------------------------

    \900\ Some investment advisers report on Item 5.E. of Form ADV
that they receive ``commissions.'' As a form of deferred sales load,
all payments of ongoing sales charges to intermediaries would
constitute transaction-related compensation. Intermediaries
receiving those payments should consider whether they need to
register as broker-dealers under section 15 of the Exchange Act.

      Table 5--Registered Investment Advisers Compensation by Type
------------------------------------------------------------------------
           Compensation type                   Yes              No
------------------------------------------------------------------------
A Percentage of Assets Under Management           12,678             614
Hourly Charges.........................            3,914           9,378
Subscription Fees (For a Newsletter or               122          13,170
 Periodical)...........................
Fixed Fees (Other Than Subscription                5,800           7,492
 Fees).................................
Commissions............................              454          12,838
Performance-Based Fees.................            4,938           8,354
Other..................................            1,899          11,393
------------------------------------------------------------------------

    As discussed above, many investment advisers participate in wrap
fee programs. As of December 31, 2018, more than 8.5% of the SEC-
registered investment advisers sponsor a wrap fee program and more than
13.1% act as a portfolio manager for one or more wrap

fee programs.\901\ From the data available, we are unable to determine
how many advisers provide advice about investing in wrap fee programs,
because advisers providing such advice may be neither sponsors nor
portfolio managers.
---------------------------------------------------------------------------

    \901\ A wrap fee program sponsor is as a firm that sponsors,
organizes, or administers the program or selects, or provides advice
to clients regarding the selection of, other investment advisers in
the program. See General Instructions to Form ADV.
---------------------------------------------------------------------------

(1) Disclosures for Investment Advisers
    As discussed more fully in the Fiduciary Release, investment
advisers have a duty to provide full and fair disclosure of all
material facts about the advisory relationship to their clients as well
as to obtain informed consent from their clients. \902\ SEC- and state-
registered investment advisers are also subject to express disclosure
requirements in Form ADV. Consistent with this duty and those
requirements, investment advisers file Form ADV to register with the
Commission or state securities authorities, as applicable, and provide
an annual update to the form.\903\ Part 1 of Form ADV provides
information to regulators about the registrants' ownership, investors,
and business, and it is made available to clients, prospective clients,
and the public. Advisers also prepare a Form ADV Part 2A narrative
brochure that contains information about the investment adviser's
business practices, fees, conflicts of interest, and disciplinary
information,\904\ in addition to a Part 2B brochure supplement that
includes information about the specific individuals, acting on behalf
of the investment adviser, who actually provide investment advice and
interact with the client.\905\ The Part 2A brochure is the primary
client-facing disclosure document,\906\ however, Parts 1 and 2A are
both made publicly available by the Commission through IAPD,\907\ and
advisers are generally required to deliver Part 2A and Part 2B to their
clients.
---------------------------------------------------------------------------

    \902\ See Fiduciary Release supra footnote 47.
    \903\ See Advisers Act rules 203-1 and 204-1. Part 1 of Form ADV
is the registration application for the Commission (and state
securities authorities). Part 2 of Form ADV consists of a narrative
``brochure'' about the adviser and ``brochure supplements'' about
certain advisory personnel on whom clients may rely for investment
advice. See Brochure Adopting Release, supra footnote 576.
    \904\ Part 2A of Form ADV contains 18 mandatory disclosure items
about the advisory firm, including information about an adviser's:
(i) Range of fees; (ii) methods of analysis; (iii) investment
strategies and risk of loss; (iv) brokerage, including trade
aggregation polices and directed brokerage practices, as well as the
use of soft dollars; (v) review of accounts; (vi) client referrals
and other compensation; (vii) disciplinary history; and (viii)
financial information, among other things. Much of the disclosure in
Part 2A addresses an investment adviser's conflicts of interest with
its investors, and is disclosure that the adviser, as a fiduciary,
must make to investors in some manner regardless of the form
requirements. See Brochure Adopting Release, supra footnote 576.
    \905\ Part 2B, or the ``brochure supplement,'' includes
information about certain advisory personnel that provide retail
client investment advice, and contains educational background,
disciplinary history, and the adviser's supervision of the advisory
activities of its personnel. See General Instruction 5 to Form ADV.
Registrants are not required to file Part 2B (brochure supplement)
electronically, but must preserve a copy of the supplement(s) and
make the copy available upon request.
    \906\ See Brochure Adopting Release, supra footnote 576.
    \907\ See Investment Adviser Public Disclosure, available at
https://adviserinfo.sec.gov/.
---------------------------------------------------------------------------

c. Trends in the Relative Numbers of Providers of Financial Services
    Over time, the relative number of broker-dealers and investment
advisers has changed. Figure 1 presented below shows the time series
trend of growth in broker-dealers and SEC-registered investment
advisers between 2005 and 2018. Over the last 14 years, the number of
broker-dealers has declined from over 6,000 in 2005 to less than 4,000
in 2018, while the number of investment advisers has increased from
approximately 9,000 in 2005 to over 13,000 in 2018. This change in the
relative numbers of broker-dealers and investment advisers over time
likely affects the competition for advice, and potentially alters the
choices available to retail investors regarding how to receive or pay
for such advice, the nature of the advice, and the attendant conflicts
of interest.
BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TR12JY19.003

    An increase in the number of investment advisers and a decrease in
the number of broker-dealers could have occurred for a number of
reasons, including anticipation of possible regulatory changes to the
industry, other regulatory restrictions,\908\ technological innovation
(i.e., robo-advisers and online trading platforms), product
proliferation (e.g., index mutual funds and exchange-traded products),
and industry consolidation driven by economic and market conditions,
particularly among broker-dealers. Commission staff has observed the
transition by broker-dealers from traditional brokerage services to
also providing investment advisory services (often under an investment
adviser registration, whether federal or state), and many firms have
been more focused on offering fee-based accounts that provide a steady
source of revenue rather than accounts that charge commissions and are
dependent on transactions.\909\ Broker-dealers have indicated that the
following factors have contributed to this migration: Provision of
revenue stability or increase in profitability,\910\ perceived lower
regulatory burden, and provisions of more services to retail
customers.\911\
---------------------------------------------------------------------------

    \908\ See Hester Peirce, Dwindling Numbers in the Financial
Industry, Brookings Center on Markets and Regulation Report (May 15,
2017), at 5, available at https://www.brookings.edu/research/dwindling-numbers-in-the-financial-industry (``Brookings Report'')
which notes that ``SEC restrictions have increased by almost thirty
percent [since 2000],'' and that regulations post-2010 were driven
in large part by the Dodd-Frank Act. Further, the Brookings Report
observation of increased regulatory restrictions on broker-dealers
only reflects CFTC or SEC regulatory actions, but does not include
regulation by FINRA, SROs, National Futures Association, or the
MSRB.
    \909\ See id. at 7. Beyond Commission observations, the
Brookings Report also discusses the shift from broker-dealer to
investment advisory business models for retail investors. Declining
transaction-based revenue due to declining commission rates and
competition from discount brokerage firms has made fee-based
products and services more attractive to providers of such products
and services. Although discount brokerage firms generally provide
execution-only services and do not compete directly in the advice
market with full service broker-dealers and investment advisers,
entry by discount brokers has contributed to lower commission rates
throughout the broker-dealer industry. Further, fee-based activity
generates a steady stream of revenue regardless of the customer
trading activity, unlike commission-based accounts; see also Angela
A. Hung, et al., Investor and Industry Perspectives on Investment
Advisers and Broker-Dealers, RAND Institute for Civil Justice
Technical Report (2008), available at https://www.rand.org/content/dam/rand/pubs/technical_reports/2008/RAND_TR556.pdf (``RAND 2008''),
which discusses a shift from transaction-based to fee-based
brokerage accounts prior to recent regulatory changes.
    \910\ Commission staff examined a sample of recent Form 10-K or
Form 10-Q filings of large broker-dealers, many of which are dually
registered as investment advisers, that have a large fraction of
retail customer accounts to identify relevant broker-dealers. See,
e.g., The Jones Financial Companies, L.L.L.P., Form 10-K (Mar. 14,
2019), available at https://www.sec.gov/Archives/edgar/data/815917/000156459019007788/ck0000815917-10k_20181231.htm; Raymond James
Financial, Inc., Form 10-K (Nov. 21, 2018), available at https://www.sec.gov/Archives/edgar/data/720005/000072000518000083/rjf-20180930x10k.htm; Stifle Financial Corp., Form 10-K (Feb. 20, 2019),
available at https://www.sec.gov/Archives/edgar/data/720672/000156459019003474/sf-10k_20181231.htm; Wells Fargo & Co., 10-K
(Feb. 27, 2019) available at https://www.sec.gov/Archives/edgar/data/72971/000007297119000227/wfc-12312018x10k.htm; and Ameriprise
Financial Inc., Form 10-K (Feb. 23, 2018), available at https://www.sec.gov/Archives/edgar/data/820027/000082002718000008/amp12312017.htm. Discussions in Form 10-K and 10-Q filings of this
sample of broker-dealers here may not be representative of other
large broker-dealers or of small to mid-size broker-dealers. Some
firms have reported record profits as a result of moving clients
into fee-based accounts, and cite that it provides ``stability and
high returns.'' See Hugh Son, Morgan Stanley Wealth Management fees
climb to all-time high, Bloomberg (Jan. 18, 2018), available at
https://www.bloomberg.com/news/articles/2018-01-18/morgan-stanley-wealth-management-fees-hit-record-on-stock-rally. Morgan Stanley
increased the percentage of client assets in fee-based accounts from
37% in 2013 to 44% in 2017, while decreasing the dependence on
transaction-based revenues from 30% to 19% over the same time period
(Morgan Stanley, Strategic Update (Jan. 18, 2018), available at
https://www.morganstanley.com/about-us-ir/shareholder/4q2017-strategic-update.pdf); see also Lisa Beilfuss & Brian Hershberg, WSJ
Wealth Adviser Briefing: The Reinvention of Morgan and Merrill,
Adviser Profile, The Wall Street Journal (Jan. 25, 2018), available
at https://blogs.wsj.com/moneybeat/2018/01/25/wsj-wealth-adviser-briefing-the-reinvention-of-morgan-and-merrill-adviser-profile/.
    \911\ See Regulation Best Interest Release, supra footnote 47,
at Section III.B.2.e.ii, which discusses industry trends.
---------------------------------------------------------------------------

    Further, there has been a substantial increase in the number of
retail clients of investment advisers, both high net worth clients and
non-high net worth clients as shown in Figure 2. Although the number of
non-high net worth retail customers of investment advisers dipped
between 2010 and 2012, since 2012, more than 12 million new non-high
net worth retail clients have been added. With respect to assets under
management, we observe a similar, albeit more pronounced pattern for
non-high net worth retail clients as shown in Figure 3. For high net
worth retail clients, there has been a pronounced increase in AUM since
2012, although AUM has leveled off since 2015.

[GRAPHIC] [TIFF OMITTED] TR12JY19.004

[GRAPHIC] [TIFF OMITTED] TR12JY19.005

BILLING CODE 8011-01-C
d. Registered Representatives of Broker-Dealers, Investment Advisers
and Dually Registered Firms
    We estimate the number of associated natural persons of broker-
dealers through data obtained from Form U4, which generally is filed
for individuals who are engaged in the securities or investment banking
business of a broker-dealer that is a member of a SRO (``registered
representatives'').\912\ Similarly, we approximate the number of
supervised persons of registered investment advisers through the number
of registered investment adviser representatives (or ``registered
IAR''s), who are supervised persons of investment advisers who meet the
definition of investment adviser representatives in Advisers Act rule
203A-3 and are registered with one or more state securities authorities
to solicit or communicate with clients.\913\
---------------------------------------------------------------------------

    \912\ The number of associated natural persons of broker-dealers
may be different from the number of registered representatives of
broker-dealers because clerical/ministerial employees of broker-
dealers are associated persons but are not required to register with
the firm. Therefore, the registered representative number does not
include such persons. However, we do not have data on the number of
associated natural persons and therefore are not able to provide an
estimate of the number of associated natural persons. We believe
that the number of registered representatives is an appropriate
approximation because they are the individuals at broker-dealers
that provide advice and services to customers.
    \913\ See 17 CFR 275.203A-3. However, the data on numbers of
registered IARs may undercount the number of supervised persons of
investment advisers who provide investment advice to retail
investors because not all supervised persons who provide investment
advice to retail investors are required to register as IARs. For
example, Commission rules exempt from IAR registration supervised
persons who provide advice only to non-individual clients or to
individuals that meet the definition of ``qualified client.'' In
addition, state securities authorities may impose different criteria
for requiring registration as an investment adviser representative.
---------------------------------------------------------------------------

    We estimate the number of registered representatives and registered
IARs, including dually registered financial professionals, (together
``registered financial professionals'') at broker-dealers, investment
advisers, and dual registrants by considering only the employees of
those firms that have Series 6 or Series 7 licenses or are registered
with a state as a broker-dealer agent or investment adviser
representative.\914\ We only consider employees at firms who have
retail-facing business, as defined previously.\915\ We observe in Table
6 that approximately 60% of registered financial professionals are
employed by dually registered entities. The percentage varies by the
size of the firm. For example, in firms with total assets between $1
billion and $50 billion, 67% of all registered financial professionals
are employed by dually registered firms. Focusing on dually registered
firms only, approximately 62.7% of total licensed representatives at
these firms are dually registered financial professionals,
approximately 36.9% are only registered representatives; and less than
one percent are only registered investment adviser representatives.
---------------------------------------------------------------------------

    \914\ We calculate these numbers based on Form U4 filings.
Representatives of broker-dealers, investment advisers, and issuers
of securities must file this form when applying to become registered
in appropriate jurisdictions and with SROs. Firms and
representatives have an obligation to amend and update information
as changes occur. Using the examination information contained in the
form, we consider an employee a financial professional if he has an
approved, pending, or temporary registration status for either
Series 6 or 7 (RR) or is registered as an investment adviser
representative in any state or U.S. territory (IAR). We limit the
firms to only those that do business with retail investors, and only
to licenses specifically required for an RR or IAR.
    \915\ See supra footnotes 864 and 893.

           Table 6--Total Registered Representatives at Broker-Dealers, Investment Advisers, and Dually Registered Firms With Retail Investors
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         % of reps. in   % of reps. in   % of reps. in                      % reps. in
   Size of firm (total assets for standalone BDs and     Total number       dually       standalone BD  standalone BD w/  % of reps. in    standalone IA
   dually registered firms; AUM for standalone IAs)        of reps.       registered        w/an IA         o an IA      standalone IA w/    w/o a BD
                                                                             firms         affiliate       affiliate      a BD affiliate     affiliate
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$50 billion..........................................          84,461              73               7                0               19               1
$1 billion to $50 billion.............................         170,256              67              11                0               15               7
$500 million to $1 billion............................          29,874              71               5                1                7              16
$100 million to $500 million..........................          66,924              51              27                0                4              18
$10 million to $100 million...........................         106,178              55              42                1                1               1
$1 million to $10 million.............................          33,790              35              54               11                0               0
<$1 million...........................................          12,522               8              52               36                3               1
                                                       -------------------------------------------------------------------------------------------------
    Total Licensed Representatives \916\..............         504,005              60              23                2                9               6
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In Table 7 below, we estimate the number of employees who are
registered representatives, registered investment adviser
representatives, or both (``dually registered representatives'').\917\
Similar to Table 6, we calculate these numbers using Form U4 filings.
Here, we also limit the sample to employees at firms that have retail-
facing businesses as discussed previously.\918\
---------------------------------------------------------------------------

    \916\ The classification of firms as dually registered,
standalone broker-dealers, and standalone investment advisers comes
from Forms BD, FOCUS, and ADV as described earlier. The number of
representatives at each firm is obtained from Form U4 filings. Note
that all percentages in the table have been rounded to the nearest
whole percentage point.
    \917\ We calculate these numbers based on Form U4 filings.
    \918\ See supra footnotes 864 and 893.
---------------------------------------------------------------------------

    In Table 7, approximately 25% of registered employees at registered
broker-dealers or investment advisers are dually registered
representatives. However, this proportion varies significantly across
size categories. For example, for firms with total assets between $1
billion and $50 billion,\919\ approximately 35% of all registered
employees are both registered representatives and investment adviser

representatives. In contrast, for firms with total assets below $1
million, 13% of all employees are dually registered representatives.
---------------------------------------------------------------------------

    \919\ Firm size is defined as total assets from the balance
sheet for broker-dealers and dually registered firms (source: FOCUS
reports) and as assets under management for investment advisers
(source: Form ADV). We are unable to obtain customer assets for
broker-dealers, and for investment advisers. We can only obtain
information from Form ADV as to whether the firm assets exceed $1
billion. We recognize that our approach of using firm assets for
broker-dealers and customer assets for investment advisers does not
allow for direct comparison; however, our objective is to provide
measures of firm size and not to make comparisons between broker-
dealers and investment advisers based on firm size. Across both
broker-dealers and investment advisers, larger firms, regardless of
whether we stratify on firm total assets or assets under management,
have more customer accounts, are more likely to be dually
registered, and have more representatives or employees per firm,
than smaller broker-dealers or investment advisers.

        Table 7--Employees at Retail Facing Firms Who Are Registered Representatives, Investment Adviser
                                            Representatives, or Both
----------------------------------------------------------------------------------------------------------------
                                                                 Percentage of    Percentage of
 Size of firm (total assets for standalone BDs   Total number        dually         registered    Percentages of
     and dually registered firms; AUM for        of employees      registered    representatives     IARs only
                standalone IAs)                                 representatives        only
----------------------------------------------------------------------------------------------------------------
>$50 billion..................................         218,539               19               16               1
$1 billion to $50 billion.....................         328,842               35               12               4
$500 million to $1 billion....................          43,211               18               40              10
$100 million to $500 million..................         119,214               23               24               9
$10 million to $100 million...................         176,559               20               39               1
$1 million to $10 million.....................          56,230               17               39               1
<$1 million...................................          18,334               13               46               3
                                               -----------------------------------------------------------------
    Total Employees at Retail Facing Firms             960,929               25               23               4
     \920\....................................
----------------------------------------------------------------------------------------------------------------

    Approximately 87% of investment adviser representatives are dual-
hatted as registered representatives. This percentage is relatively
unchanged from 2010. According to information provided in a FINRA
comment letter in connection with the 913 Study,\921\ 87.6% of
registered investment adviser representatives were dually registered as
registered representatives as of mid-October 2010.\922\ In contrast,
approximately 52% of registered representatives were dually registered
as investment adviser representatives at the end of 2018.\923\
---------------------------------------------------------------------------

    \920\ See supra footnotes 918 and 919. Note that all percentages
in the table have been rounded to the nearest whole percentage
point.
    \921\ See Staff of the Securities and Exchange Commission, Study
on Investment Advisers and Broker-Dealers as Required by Section 913
of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Jan. 2011), available at www.sec.gov/news/studies/2011/913studyfinal.pdf (``913 Study'').
    \922\ Comment Letter of FINRA to File Number 4-606; Obligations
of Brokers, Dealers and Investment Advisers (Nov. 3, 2010), at 1,
available at https://www.sec.gov/comments/4-606/4606-2836.pdf.
    \923\ In order to obtain the percentage of IARs that are dually
registered as registered representatives of broker-dealers, we sum
the representatives at dually registered firms and those at
investment advisers across size categories to obtain the aggregate
number of representatives in each of the two categories. We then
divide the aggregate dually registered representatives by the sum of
the dually registered representatives and the IARs at investment
adviser-only firms. We perform a similar calculation to obtain the
percentage of registered representatives of broker-dealers that are
dually registered as IARs.
---------------------------------------------------------------------------

    Broker-dealers and investment advisers must report certain
criminal, regulatory, and civil actions and complaint information and
information about certain financial matters in Forms U4 \924\ and U5
\925\ for their representatives. SROs, regulators and jurisdictions
report disclosure events on Form U6.\926\ FINRA's BrokerCheck system
and IAPD discloses to the public certain information on registered
representatives and investment adviser representatives, respectively,
such as principal place of business, business activities, owners, and
criminal prosecutions, regulatory actions, and civil actions in
connection with any investment-related activity.
---------------------------------------------------------------------------

    \924\ Form U4 requires disclosure of registered representatives'
and investment adviser representatives' criminal, regulatory, and
civil actions similar to those reported on Form BD or Form ADV as
well as certain customer-initiated complaints, arbitration, and
civil litigation cases. See generally Form U4.
    \925\ Form U5 requires information about representatives'
termination from their employers.
    \926\ See FINRA, Current Uniform Registration Forms for
Electronic Filing in Web CRD[supreg], available at http://www.finra.org/industry/web-crd/current-uniform-registration-forms-electronic-filing-web-crd.
---------------------------------------------------------------------------

e. Investor Account Statistics
    Investors seek financial advice and services to achieve a number of
different goals, such as saving for retirement or children's college
education. The OIAD/RAND survey estimates that approximately 73% of
adults live in a household that invests.\927\ The survey indicates that
non-investors are more likely to be female, to have lower family income
and educational attainment, and to be younger than investors.\928\
Approximately 35% of households that do invest do so through accounts
such as broker-dealer or advisory accounts.\929\
---------------------------------------------------------------------------

    \927\ See OIAD/RAND, supra footnote 3 (defining ``investors'' as
persons ``owning at least one type of investment account, (e.g., an
employer-sponsored retirement account, a non-employer sponsored
retirement account such as an IRA, a college savings investment
account, or some other type of investment account such as a
brokerage or advisory account), or owning at least one type of
investment asset (e.g., mutual funds, exchange-traded funds or other
funds, individual stocks, individual bonds, derivatives, and
annuities)'').
    \928\ OIAD/RAND, supra footnote 3.
    \929\ Id..
---------------------------------------------------------------------------

    As shown above in Figures 2 and 3, the number of retail investors
and their assets under management associated with investment advisers
has increased significantly, particularly since 2012. According to the
Investment Company Institute (``ICI''), as of December 2016, nearly
$24.2 trillion is invested in retirement accounts, of which $7.5
trillion is in IRAs.\930\ A total of 43.3 million U.S. households have
either an IRA or a brokerage account, of which an estimated 20.2
million U.S. households have a brokerage account and 37.7 million
households have an IRA (including 72% of households that also hold a
brokerage account).\931\ With respect to IRA accounts, one commenter,
the ICI, documents that 43 million U.S. households own either
traditional or Roth IRAs and that approximately 70% are held with
financial professionals, with the remainder being direct market.\932\

Further, ICI finds that approximately 64% of households have aggregate
IRA (traditional and Roth) balances of less than $100,000, and
approximately 36% of investors have balances below $25,000. As noted in
one study, the growth of assets in traditional IRAs comes from
rollovers from workplace retirement plans; for example, 58% of
traditional IRAs consist of rollover assets, and contributions due to
rollovers exceeded $460 billion in 2015 (the most recently available
data).\933\
---------------------------------------------------------------------------

    \930\ See Sarah Holden & Daniel Schrass, The Role of IRAs in US
Households' Saving for Retirement, 2016, 23 ICI Res. Persp. 23-1
(Jan. 2017), available at https://www.ici.org/pdf/per23-01.pdf.
    \931\ The data is obtained from the Federal Reserve System's
2016 Survey of Consumer Finances (``SCF''), a triennial survey of
approximately 6,200 U.S. households and imputes weights to
extrapolate the results to the entire U.S. population. As noted,
some survey respondent households have both a brokerage and an IRA
account. See Board of Governors of the Federal Reserve System,
Survey of Consumer Finances (2016), available at https://www.federalreserve.gov/econres/scfindex.htm. The SCF data does not
directly examine the incidence of households that could use advisory
accounts instead of brokerage accounts; however, some fraction of
IRA accounts reported in the survey could be those held at
investment advisers.
    \932\ See Sarah Holden & Daniel Schrass, The Role of IRAs in
U.S. Households' Saving for Retirement, 2018, ICI Res. Persp. 24-10
(Dec. 2018), available at https://www.ici.org/pdf/per24-10.pdf.
    \933\ See id.
---------------------------------------------------------------------------

    While the number of retail investors obtaining services from
investment advisers and the aggregate value of associated assets under
management has increased, the OIAD/RAND study also suggests that the
general willingness of investors to use planning or to take financial
advice regarding strategies, products, or accounts is relatively fixed
over time.\934\ With respect to the account assets associated with
retail investors, the OIAD/RAND survey also estimates that
approximately 10% of investors who have broker-dealer or advisory
accounts hold more than $500,000 in assets, while approximately 47%
hold $50,000 in assets or less. Altogether, many investors who have
brokerage or advisory accounts trade infrequently, with approximately
31% reporting no annual transactions and an additional approximately
30% reporting three or fewer transactions per year.\935\
---------------------------------------------------------------------------

    \934\ OIAD/RAND, supra footnote 3 (noting that this conclusion
was limited by the methodology of comparing participants in a 2007
survey with those surveyed in 2018).
    \935\ OIAD/RAND, supra footnote 3.
---------------------------------------------------------------------------

    With respect to particular products, commenters have provided us
with additional information about ownership of mutual funds and IRA
account statistics. For example, ICI stated that 56 million U.S.
households and nearly 100 million individual investors own mutual
funds, of which 80% are held through 401(k) and other workplace
retirement plans, while 63% of investors hold mutual funds outside of
those plans.\936\ Of those investors that own mutual funds outside of
workplace retirement plans, approximately 50% rely on financial
professionals, while nearly one-third purchase direct-sold funds either
directly from the fund company or through a discount broker.\937\
---------------------------------------------------------------------------

    \936\ See ICI Letter; see also Sarah Holden, Daniel Schrass &
Michael Bogdan, Ownership of Mutual Funds, Shareholder Sentiment,
and Use of the internet, 2018, ICI Res. Persp. 24-8 (Nov. 2018),
available at https://www.ici.org/pdf/per24-08.pdf.
    \937\ See id.
---------------------------------------------------------------------------

    Table 8 below provides an overview of account ownership segmented
by account type (e.g., IRA, brokerage, or both) and investor income
category based on the SCF.\938\
---------------------------------------------------------------------------

    \938\ Id. To the extent that investors have IRA accounts at
banks that are not also registered as broker-dealers, our data may
overestimate the numbers of IRA accounts held by retail investors
that could be subject to this rulemaking.

                         Table 8--Ownership by Account Type in the U.S. by Income Group
                                          [As reported by the 2016 SCF]
----------------------------------------------------------------------------------------------------------------
                                                                                % Both
                         Income category                            % Brokerage     % IRA only     brokerage and
                                                                       only                             IRA
----------------------------------------------------------------------------------------------------------------
Bottom 25%......................................................             1.2             7.6             2.4
25%-50%.........................................................             3.2             14.             5.4
50%-75%.........................................................             4.1            21.4            11.4
75%-90%.........................................................             7.5            33.4            16.5
Top 10%.........................................................            12.0            24.7            43.9
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Average.....................................................             4.4            18.3            11.6
----------------------------------------------------------------------------------------------------------------

    With respect to the nature of the accounts held by investors and
whether they are managed by financial professionals, the OIAD/RAND
survey finds that 36% of its sample of participants report that they
currently use a financial professional and approximately 33% receive
some kind of recommendation service.\939\ Of the subset of those
investors who report holding a brokerage, advisory, or similar account,
approximately 33% self-direct their own account, 25% have their account
managed by a financial professional, and 10% have their account advised
by a professional.\940\ For those investors who take financial advice,
the OIAD/RAND study suggests that they may differ in characteristics
from other investors. Investors who take financial advice are generally
older, retired, and have a higher income than other investors, but also
may have lower educational attainment (e.g., high school or less) than
other investors.\941\
---------------------------------------------------------------------------

    \939\ OIAD/RAND, supra footnote 3. In a focus group preceding
the survey, focus group participants provided a number of reasons
for not using a financial professional in making investments,
including being unable or unwilling to pay the fees, doing their own
financial research, being unsure of how to work with a professional,
and being concerned about professionals selling products without
attending to investors' plans and goals.
    \940\ Id.
    \941\ Id.
---------------------------------------------------------------------------

    Similarly, one question in the SCF asks what sources of information
households' financial decision-makers use when making decisions about
savings and investments. Respondents can list up to fifteen possible
sources from a preset list that includes ``Broker'' or ``Financial
Planner'' as well as ``Banker,'' ``Lawyer,'' ``Accountant,'' and a list
of non-professional sources.\942\ Panel A of Table 8 below presents the
breakdown of where households who have brokerage accounts seek advice
about savings and investments. The table shows that of those
respondents with brokerage accounts, 23% (4.7 million households) use
advice services of broker-dealers for savings and investment decisions,
while 49% (7.8 million households) take advice from a ``financial
planner.'' Approximately 36% (7.2 million households) seek advice from
other sources such as bankers, accountants, and lawyers. Almost 25%
(5.0 million households) do not use advice from the above sources.
---------------------------------------------------------------------------

    \942\ The SCF, supra footnote 931, specifically asks
participants ``Do you get advice from a friend, relative, lawyer,
accountant, banker, broker, or financial planner? Or do you do
something else?'' (see Federal Reserve, Codebook for 2016 Survey of
Consumer Finances (2016), available at https://www.federalreserve.gov/econres/files/codebk2016.txt). Other response
choices presented by the survey include ``Calling Around,''
``Magazines,'' ``Self,'' ``Past Experience,'' ``Telemarketer,'' and
``Insurance Agent,'' as well as other choices. Respondents could
also choose ``Do Not Save/Invest.'' The SCF allows for multiple
responses, so these categories are not mutually exclusive. However,
we would note that the list of terms in the question does not
specifically include ``investment adviser.''
---------------------------------------------------------------------------

    Panel B of Table 9 below presents the breakdown of advice received
for

households who have an IRA. 15% (5.7 million households) rely on advice
services of their broker-dealers and 48% (18.3 million households)
obtain advice from financial planners. Approximately 41% (15.5 million
households) seek advice from bankers, accountants, or lawyers, while
the 25% (9.5 million households) use no advice or seek advice from
other sources.

   Table 9--Panel A: Sources of Advice for Households Who Have a Brokerage Account in the U.S. by Income Group
                                                      \943\
----------------------------------------------------------------------------------------------------------------
                                                                                % Taking
                                                     % Taking        % Taking       advice from     % Taking no
                 Income category                    advice from     advice from      lawyers,     advice or from
                                                      brokers        financial      bankers, or    other sources
                                                                     planners       accountants
----------------------------------------------------------------------------------------------------------------
Bottom 25%......................................           20.55           53.89           35.64           24.30
25%-50%.........................................           22.98           38.03           43.92           32.36
50%-75%.........................................           20.75           52.00           31.42           23.61
75%-90%.........................................           22.56           48.94           32.25           28.10
Top 10%.........................................           25.29           50.53           38.47           21.06
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Average.....................................           23.02           49.02           35.99           24.94
----------------------------------------------------------------------------------------------------------------

      Table 9--Panel B: Sources of Advice for Households Who Have an IRA in the U.S. by Income Group \944\
----------------------------------------------------------------------------------------------------------------
                                                                                % Taking
                                                     % Taking        % Taking       advice from     % Taking no
                 Income category                    advice from     advice from      bankers,     advice or from
                                                      brokers        financial     accountants,    other sources
                                                                     planners       or lawyers
----------------------------------------------------------------------------------------------------------------
Bottom 25%......................................           12.14           38.30           43.69           31.85
25%-50%.........................................            9.79           43.82           40.67           32.74
50%-75%.........................................           14.93           45.20           41.23           25.23
75%-90%.........................................           14.68           52.14           41.65           24.26
Top 10%.........................................           21.40           55.40           40.03           18.56
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Average.....................................           15.25           48.45           41.17           25.28
----------------------------------------------------------------------------------------------------------------

    The OIAD/RAND survey notes that for survey participants who
reported working with a specific individual for investment advice, 70%
work with a dually registered firm, 5.4% with a broker-dealer, and 5.1%
with an investment adviser.\945\
---------------------------------------------------------------------------

    \943\Id.
    \944\Id.
    \945\ OIAD/RAND, supra footnote 3. As documented by OIAD/RAND,
retail investors surveyed had difficulty in accurately identifying
the type of relationship that they have with their financial
professional.
---------------------------------------------------------------------------

2. Investor Perceptions About the Marketplace for Financial Services
and Disclosures
    Our proposal discussed a number of studies providing information on
investors' perceptions of the market for financial services and advice,
including those conducted by Siegel & Gale \946\ in 2005, RAND \947\ in
2008 and CFA in 2010.\948\ Commenters to the proposal provided their
own studies or survey evidence conducted by third party research firms,
which we have discussed throughout the release.\949\ In addition, the
Commission's Office of the Investor Advocate collaborated with RAND to
prepare the OIAD/RAND study,\950\ which included focus groups and a
survey about the retail market for investor advice. The Commission's
Office of the Investor Advocate also engaged RAND to conduct investor
testing of the proposed relationship summary using the dual registrant
sample in the proposal. The report, RAND 2018,\951\ discusses both
larger sample survey results and smaller sample in-depth interview
results. Finally, the proposal solicited public feedback from
individual investors on a feedback form issued with the Proposing
Release.\952\ Responses and data from these sources inform our
understanding of how investors approach the marketplace for financial
services and how investors respond to disclosures about financial
services generally.
---------------------------------------------------------------------------

    \946\ Proposing Release, supra footnote 5, at n.555.
    \947\ Id., at n.556.
    \948\ Id., at n.557.
    \949\ See supra footnotes 17-21.
    \950\ OIAD/RAND consisted of focus group discussions with 35
participants in total. OIAD/RAND caveats in its report that the
participants in its focus groups were neither nationally
representative nor randomly selected and that their results are
anecdotal. OIAD/RAND also included a nationally representative
probability based survey to allow researchers to reliably construct
population estimates. OIAD/RAND, supra footnote 3.
    \951\ For RAND 2018, a sample of 1,816 individuals from the ALP
Survey Panel were invited to complete the survey, and 1,460 (80.4%)
actually completed the survey. 26% of respondents are categorized as
non-investor. Median time spent going through the initial five
screens of the relationship summary text was 4 minutes. RAND 2018,
supra footnote 13.
    \952\ Proposing Release, supra footnote 5; see also Feedback
Forms Comment Summary, supra footnote 13. More than 90 individuals
answered with a response or comment relevant to at least one of the
questions on the form, using an online version of the feedback form
or by submitting a copy of the feedback form to the comment file in
PDF format.
---------------------------------------------------------------------------

a. How Investors Select Financial Firms or Professionals
    A number of surveys show that retail investors predominantly find
their current financial firm or financial professional from personal
referrals by family, friends, or colleagues.\953\ For instance, the
RAND 2008 study reported that 46% of survey respondents indicated that
they located a financial professional from personal referral, although
this percentage varied

depending on the type of service provided (e.g., only 35% of survey
participants used personal referrals for brokerage services). After
personal referrals, RAND 2008 survey participants ranked professional
referrals (31%), print advertisements (4%), direct mailings (3%),
online advertisements (2%), and television advertisements (1%), as
their source of locating individual professionals. The RAND 2008 study
separately inquired about locating a financial firm,\954\ in which
respondents reported selecting a financial firm (of any type) based on:
Referral from family or friends (29%), professional referral (18%),
print advertisement (11%), online advertisements (8%), television
advertisements (6%), direct mailings (2%), with a general ``other''
category (36%).
---------------------------------------------------------------------------

    \953\ See RAND 2008, supra footnote 912; 917 Financial Literacy
Study, supra footnote 589.
    \954\ The Commission notes that only one-third of the survey
respondents that responded to ``method to locate individual
professionals'' also provided information regarding locating the
financial firm.
---------------------------------------------------------------------------

    The 917 Financial Literacy Study provides similar responses,
although it allowed survey respondents to identify multiple sources
from which they obtained information that facilitated the selection of
the current financial firm or financial professional.\955\ In the 917
Financial Literacy Study,\956\ 51% of survey participants received a
referral from family, friends, or colleagues. Other sources of
information or referrals came from: Referral from another financial
professional (23%), online search (14%), attendance at a financial
professional-hosted investment seminar (13%), advertisement (e.g.,
television or newspaper) (11.5%), other (8%), while approximately 4%
did not know or could not remember how they selected their financial
firm or financial professional. Twenty-five percent of survey
respondents indicated that the ``name or reputation of the financial
firm or financial professional'' affected the selection decision.
---------------------------------------------------------------------------

    \955\ See 917 Financial Literacy Study, supra footnote 589.
    \956\ The data used in the 917 Financial Literacy Study comes
from the Siegel & Gale, Investor Research Report (Jul. 26, 2012),
available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part3.pdf.
---------------------------------------------------------------------------

    The OIAD/RAND focus group study notes that among the factors that
group participants report for not working with a financial professional
was participants being unsure how they would go about working with a
professional.\957\
---------------------------------------------------------------------------

    \957\ OIAD/RAND, supra footnote 3.
---------------------------------------------------------------------------

b. Investor Confusion
    As discussed in the Proposing Release and by commenters to the
proposal, many sources indicate that retail investors do not understand
or find confusing the distinctions between broker-dealers and
investment advisers, particularly in terms of services provided and
applicable standards of conduct.\958\
---------------------------------------------------------------------------

    \958\ See generally supra Section II.B.2 (discussing benefits of
including disclosure on individualized firm services); Section
II.B.6 (discussing removal of generalized comparisons between
advisers and broker-dealers); see also Proposing Release, supra
footnote 5 (discussing commenters in response to Chairman Clayton's
2017 request for comment and commenters to the 913 Study).
---------------------------------------------------------------------------

    Studies such as those conducted by Siegel & Gale \959\ in 2005,
RAND \960\ in 2008, and CFA in 2010,\961\ discussed in the Proposing
Release, support findings that retail investors are confused about the
roles and titles of financial professionals. The OIAD/RAND study
assessed survey and focus group participants' understanding of the
types of financial services and financial professionals they used.\962\
Specifically, the authors of the OIAD/RAND study asked survey
participants who were investors to identify which type of financial
professional they worked with (investment adviser, broker-dealer, or
dually-registered firm). The authors compared the types of financial
professionals reported by the survey participants with the actual
status of those financial professionals as verified on the IAPD
database, and found that the verified types of financial professionals
in many cases did not match the types of financial professionals that
were reported by the survey participants.\963\ For example, when
financial professionals were verified to be dually registered, only 34%
were reported by survey participants to be dually registered (and 56%
were reported to be only investment advisers). In addition to the
survey, the OIAD/RAND authors also asked a small focus group of
participants that used financial professionals to identify which type
of professional they were using, which was then verified by IAPD. Only
one of the twelve participants was able to identify the correct type of
financial professional unambiguously (although it was not clear if
clients of verified dually-registered firms were only utilizing one
type of that professional's services). The study authors concluded that
this showed low awareness of the classification of investment advisers
and broker-dealers.
---------------------------------------------------------------------------

    \959\ Proposing Release, supra footnote 5, at Section IV.A.3.h.
(stating that the Siegel & Gale Study found that focus group
participants did not understand that the roles and legal obligations
of broker-dealers differed from investment advisers' roles and legal
obligations, and were further confused by different labels or titles
used by advice providers (e.g., financial planner, financial
advisor, financial consultant, broker-dealer, or investment
adviser). More specifically, participants in the Siegel & Gale Study
focus groups believed that brokers executed trades and were focused
on ``near-term'' advice, while financial advisors and consultants
provided many of the same services as brokers, but also provided a
greater scope of long-term planning advice (e.g., portfolio
allocation). ``Investment adviser,'' on the other hand, was a term
unfamiliar to many participants, but financial professionals using
this label were perceived to provide similar services to financial
advisors and financial consultants. Financial planners were viewed
to provide services related to insurance and estate planning in
addition to investment advice, and encompassed long-term financial
planning including college, retirement, and other long-term savings
and investment goals. The Siegel & Gale Study focus group
participants assumed that financial advisors/consultants, investment
advisers, and financial planners provided planning services, while
brokers, financial advisors/consultants, and investment advisers
provided trade execution services); see also id., at n.5.
    \960\ Similarly, the RAND 2008 study generally concluded that
investors did not understand the differences between broker-dealers
and investment advisers and that common job titles contributed to
investor confusion. RAND 2008, supra footnote 909.
    \961\ Infogroup/ORC, U.S. Investors & The Fiduciary Standard,
National Opinion Survey (Sept. 15, 2010), available at https://www.cfp.net/docs/public-policy/us_investors_opinion_survey_2010-09-16.pdf (``CFA Survey''). The CFA Survey suggested that respondents
were confused about differences between broker-dealers and
investment advisers as described by the study's authors to the
respondents.
    \962\ OIAD/RAND, supra footnote 3.
    \963\ OIAD/RAND, supra footnote 3. Note that the authors
caveated that it was unclear if survey participants who were
customers of verified dually registered firms had misidentified the
type of financial professional because they only received one type
of service (brokerage or advisory) from the dually registered firm.
---------------------------------------------------------------------------

    Further, the OIAD/RAND survey asked all survey recipients whether
they could identify the type of financial professional that would
typically exhibit certain business practices (such as executing
transactions or being paid by commission), and concluded that at least
a significant minority of participants could not do so for any of the
typical practices. Between 13% and 21% of survey participants
incorrectly answered ``none of the above'' for each of the business
practices offered by the survey, although those practices were aligned
with either investment advisers or broker-dealers in the marketplace.
Moreover, only 36% of participants were able to identify that
investment advisers were typically paid by a percentage of assets,
whereas 43% of participants thought that practice was typical of
broker-dealers. Twenty-six percent of participants incorrectly
indicated that investment advisers execute transactions for
clients.\964\ In

all, the study authors concluded that the survey participants'
knowledge of the marketplace for financial professionals appeared to be
incomplete.
---------------------------------------------------------------------------

    \964\ OIAD/RAND, supra footnote 3. The study authors also
concluded that ``an investor who works with an investment adviser
because he or she is unaware that broker-dealers can execute
transactions, and who seeks a professional solely to execute
transactions on their behalf, might not necessarily be matched with
the most appropriate professional.''
---------------------------------------------------------------------------

    The OIAD/RAND study authors draw further conclusions from their
focus group study, where after being offered explanations of the
differences between investment advisers and broker-dealers, some focus
group participants continued not to be able to understand the
distinctions between the two types of professionals. For the OIAD/RAND
study authors, the focus group exercise underscored the difficulty of
the topic for some investors.
    Investors are also confused about financial professionals'
standards of conduct and legal obligations. As discussed in the
Proposing Release, the Siegel & Gale and RAND 2008 studies found that
focus group participants generally did not understand legal terms, such
as ``fiduciary'' or ``best interest.'' \965\ In addition, the RAND 2008
study noted that the confusion about titles, services, legal
obligations, and compensation persisted even after a fact sheet on
broker-dealers and investment advisers was provided to
participants.\966\
---------------------------------------------------------------------------

    \965\ Proposing Release, supra footnote 5.
    \966\ RAND 2008, supra footnote 909.
---------------------------------------------------------------------------

    Similarly, many survey respondents in the OIAD/RAND study had
difficulty understanding the basic relational aspects of financial
advice and the responsibility for taking risk in any form.\967\ Thirty
percent of survey respondents believed that financial professionals
would get paid only if an investor made money on an investment, and
another quarter of respondents indicated that they did not know if
financial professionals would get paid only if an investor made money
on an investment.\968\ A majority of survey respondents expected that a
financial professional acting in the client's best interest would
monitor the account, help the client choose the lowest cost products,
disclose payments they receive, and avoid taking higher compensation
for selling one product over another when a similar but less costly
product is available.\969\ OIAD/RAND focus group discussions about the
distinctions between investment advisers and broker-dealers also
suggested that some focus group participants were not able to
distinguish investment advisers from broker-dealers. The study's
authors concluded that comments of those focus group participants also
suggest that some individuals might value having a clear distinction
between professionals who do act in the client's best interest and
professionals who do not act in the client's best interest.\970\
Similarly, in RAND 2018 and in interview-based studies submitted by a
group of commenters that test the proposed sample dual-registrant
relationship summary, it was observed that investors could have
difficulty understanding distinctions between the standard of conduct
applicable to broker-dealers and investment advisers.\971\
---------------------------------------------------------------------------

    \967\ OIAD/RAND, supra footnote 3.
    \968\ OIAD/RAND, supra footnote 3.
    \969\ OIAD/RAND, supra footnote 3.
    \970\ OIAD/RAND, supra footnote 3.
    \971\ See supra Section II.B.3.b at footnotes 470-479 and
accompanying text.
---------------------------------------------------------------------------

    With respect to investor perceptions of financial advisers' fees
and potential conflicts of interest, the OIAD/RAND study revealed that
``some participants seemed unconcerned with conflicts or took it as a
good sign if their professional had not disclosed a conflict to them .
. . In all three groups that had experience using a financial
professional . . . participants reported that their professional had
not disclosed any conflicts.'' \972\ The OIAD/RAND study also found
that almost a half of the investors who received investment advice in
the study believed that their investment professional receives
commissions. About a third believed the provider received payments from
product companies (e.g., mutual funds); another 20% of participants
believed the provider received a bonus. Altogether, more than half of
the participants believed the provider received some sort of
compensation whether through commission, bonus or product payment.\973\
The study concluded that ``awareness of the nature of provider payments
could help investors to recognize conflicts of interest . . .'' and
thus it could potentially improve investors' decision making. Potential
investor recognition of the importance of the conflicts of interest is
reflected in that 51% of the OIAD/RAND study respondents said that it
was important or extremely important that the financial professional
receive all compensation from the customer, and only 15% reported that
it was not important at all.\974\
---------------------------------------------------------------------------

    \972\ OIAD/RAND, supra footnote 3.
    \973\ OIAD/RAND, supra footnote 3.
    \974\ OIAD/RAND, supra footnote 3.
---------------------------------------------------------------------------

    With respect to investor trust, one commenter discussed the results
of an online survey it had initiated that found that 96% of survey
respondents mostly or completely trusted their financial
professional.\975\ The vast majority of survey respondents (97%) also
believed that their financial professional always or mostly has their
investors' best interest in mind.\976\
---------------------------------------------------------------------------

    \975\ CCMC Letter (investor polling), supra footnote 21.
    \976\ Id.
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3. Investor Responses to Disclosures About Financial Professionals and
Firms
a. Retail Investors and Financial Disclosures Generally
    Commenters provided conclusions based on studies of potential
limitations to the efficacy of financial disclosures, as discussed
below.\977\ With respect to the particular areas of disclosure that
retail investors find helpful, commenters provided us with information
about the usefulness of such disclosures to retail investors from
surveys or assessments. We generally note that the RAND 2018 survey and
other surveys that were provided by commenters gathered participants'
subjective views and were not designed to objectively assess whether
any sample disclosures improved participant comprehension.\978\
However, the RAND 2018 qualitative interviews included some general
questions to participants about comprehension and helpfulness of the
sample proposed relationship summary, which provided some insight into
participants' understanding of concepts introduced, as did another
survey and two interview-based studies with respect to sample
relationship summaries.\979\ Further, the RAND 2018 report and surveys
and studies submitted by commenters reported that their participants
subjectively thought that they were informed from the sample
disclosures that they were provided. The RAND 2018 study authors found
that nearly 90% of respondents stated that the sample proposed
relationship summary that they reviewed would help them make informed
decisions about investment accounts and services.\980\ Likewise, the
RAND 2018 study authors also observed that interview participants
demonstrated that they learned new information from the proposed
relationship summary that they were provided. However, there was
variation in understanding among participants and the interviews also
revealed areas of

confusion.\981\ Similarly, the Woelfel survey authors noted that after
survey respondents were given time to read a sample proposed dual
registrant relationship summary, the majority, regardless of their
current investments or relationship with an investment adviser or
broker-dealer, believed that they knew a ``little more'' about
investment advisers and broker-dealers.\982\
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    \977\ See infra Section IV.C for a discussion of this research.
    \978\ See generally supra footnote 14.
    \979\ See supra footnotes 14 and 20 and accompanying text.
    \980\ See RAND 2018, supra footnote 13.
    \981\ Id.
    \982\ See Cetera Letter II (Woelfel), supra footnote 17.
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    Several commenters suggest that generally not all investors fully
read or are able to digest information from disclosures about financial
professionals. One commenter reports that almost half of its survey
participants said they selectively skim the disclosures and eight
percent said they rarely or do not ever read them.\983\ Along similar
lines, commenters pointed to observations that investors may be
overconfident in their ability to read and understand disclosures and
that investors are unable to understand disclosures relating to
compensation arrangements and conflicts of interest.\984\ Similarly,
the RAND 2008 study highlighted that participants' confusion about
titles, services, legal obligations, and compensation persisted even
after a fact sheet on broker-dealers and investment advisers was
provided to participants.\985\
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    \983\ Schwab Letter I (Koski), supra footnote 21.
    \984\ See, e.g., AARP Letter. See also Better Markets Letter,
CFA Letter I; Consumers Union Letter.
    \985\ See RAND 2008, supra footnote 909. The fact sheet provided
to RAND 2008 study participants included information on the
definition of broker and investment adviser, including a description
of common job titles, legal duties and typical compensation.
Participants in the focus groups indicated that they were confused
over common job titles of broker-dealers and investment advisers,
thought that because brokers are required to be licensed, investment
advisers were not as qualified as brokers, deemed the term
``suitable'' too vague, and concluded that it would be difficult to
prove whether or not an investment adviser was not acting in the
client's best interest.
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    With respect to what type of disclosures from firms or financial
professionals retail investors find helpful, commenters provided two
surveys of retail investors' general views of disclosures about
financial professionals in response to the Proposing Release.\986\ One
commenter reported results from an online survey that provides support
for the idea that retail investors value at least some disclosures from
financial professionals. From the a survey of 801 individuals, a
majority of the survey participants (62%) said they would be interested
in reading a hypothetical standardized document provided to all new
clients that explained the relationship between a financial
professional and clients and thought that such a document would ``boost
transparency and help build stronger relationships between me and my
financial professional'' (72%).\987\ Separately, with respect to what
aspects of financial disclosures retail investors might find most
helpful, Koski Research conducted an investor survey on behalf of
another commenter and reported that the ``majority of retail investors
want communications that are relevant to them (91%), short and to the
point (85%), and visually appealing (79%).'' \988\ The survey also
reported that the top four things retail investors wanted communicated
were the costs for advice, description of advice services, the
obligations of the firm and its representatives, and the conflicts of
interest.\989\ Additionally, approximately 70% of the participants in
the 917 Financial Literacy Study indicated that they would read
disclosures on conflicts of interest if made available.\990\
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    \986\ See Schwab Letter I (Koski), supra footnote 21 and CCMC
Letter (investor polling), supra footnote 21.
    \987\ See CCMC Letter (investor polling), supra footnote 21.
    \988\ See Schwab Letter I (Koski), supra footnote 21.
    \989\ Id. For similar evidence, see also CCMC Letter (investor
polling), supra footnote 21 (reporting that issues that ``matter
most'' to investors include: ``explaining fees and costs,''
explaining conflicts of interest'' and ``explaining own
compensation'').
    \990\ 917 Financial Literacy Study, supra footnote 588.
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b. Investor Perceptions About Specific Disclosures Concerning Financial
Professionals
(1) Conflicts of Interest
    As discussed in the Proposing Release, previous studies have found
that investors consider conflicts of interest to be an important factor
in disclosures from firms and financial professionals.\991\ For
example, in the 917 Financial Literacy Study, approximately 52.1% of
survey participants indicated that an essential component of any
disclosure would be their financial intermediary's conflicts of
interest, while 30.7% considered information about conflicts of
interest to be important, but not essential.\992\ Investors also were
asked to rate their level of concern about potential conflicts of
interest that their adviser might have. Approximately 36% of the
investors expressed concerns that their adviser might recommend
investments in products for which its affiliate receives a fee or other
compensation, while 57% were concerned that their adviser would
recommend investments in products for which it gets paid by other
sources. In addition to conflicts directly related to compensation
practices of financial professionals, some investors were concerned
about conflicts related to the trading activity of these firms. For
example, more than 26% of participants were concerned that an adviser
might buy and sell from its own account at the same time it is
recommending securities to investors; and more than 55% of investors
were also concerned about their adviser's engaging in principal
trading.
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    \991\ See Proposing Release, supra footnote 5, at Section
IV.A.3.c.
    \992\ 917 Financial Literacy Study, supra footnote 588.
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    Among those participants in the 917 Financial Literacy Study who
indicated that they would read disclosures on conflicts of interest if
made available, 48% would request additional information from their
adviser, 41% would increase the monitoring of their adviser, and 33%
would propose to limit their exposure of specific conflicts. The
majority of participants (70%) also wanted to see specific examples of
conflicts and how those related to the investment advice provided.
(2) Fees
    With respect to disclosures about fees, the Proposing Release also
discussed the 917 Financial Literacy Study as well as the FINRA
Investor Study \993\ regarding the importance that investors place on
disclosures about fees and compensation of financial professionals, and
how those disclosures should be presented.\994\ Similar to the findings
regarding conflicts of interest, the 917 Financial Literacy Study found
that a majority participants indicated that disclosure of the fees and
compensation of investment advisers was an essential element to any
disclosure.\995\
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    \993\ FINRA Investor Education Foundation, Investors in the
United States 2016 (Dec. 2016), available at http://www.usfinancialcapability.org/downloads/NFCS_2015_Inv_Survey_Full_Report.pdf (``FINRA Investor Study'').
    \994\ See Proposing Release, supra footnote 5, at Section
IV.A.3.c.
    \995\ 917 Financial Literacy Study, supra footnote 588.
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(3) Disciplinary History
    As discussed in the Proposing Release, survey evidence in the 917
Financial Literacy Study indicate that knowledge of a firm's and
financial professional's disciplinary history is among the most
important items for retail investors deciding whether to receive
financial services from a particular firm.\996\ Despite this, most

investors do not actively seek disciplinary information for their
advisers and broker-dealers. For example, a FINRA survey in 2009, found
that only 15% of survey respondents checked their financial
professional's background, although the Commission notes that the study
encompasses a wide group of advisers, such as debt counselors and tax
professionals.\997\ The FINRA Investor Study found that only 7% of
survey respondents use FINRA's BrokerCheck and approximately 14% of
survey respondents are aware of the Investment Adviser Public
Disclosure (IAPD) website.\998\
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    \996\ See 917 Financial Literacy Study, supra footnote 588, at
nn.311 and 498 and accompanying text (Approximately 67.5% of the
online survey respondents considered information about an adviser's
disciplinary history to be absolutely essential, and about 20.0%
deemed it important, but not essential, and ``When asked how
important certain factors would be to them if they were to search
for comparative information on investment advisers, the majority of
online survey respondents identified the fees charged and the
adviser's disciplinary history as the most important factors.'').
    \997\ FINRA Investor Education Foundation, Financial Capability
in the United States: Initial Report of Research Findings from the
2009 National Survey (Dec. 1, 2009), available at http://www.usfinancialcapability.org/downloads/NFCS_2009_Natl_Full_Report.pdf.
    \998\ See FINRA Investor Survey, supra footnote 993.
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C. Broad Economic Considerations

    We are adopting a requirement for broker-dealers and investment
advisers and firms that are dually registered to deliver a relationship
summary to retail investors because, as discussed in the baseline,\999\
many retail investors can be confused about their choices in the market
for brokerage and investment advisory services. To that end, the
relationship summary is meant to assist retail investors with both the
process of deciding whether to engage or remain with a particular firm
or financial professional and whether to establish or maintain an
investment advisory or brokerage relationship. Specifically, low
financial literacy, lack of knowledge about the market for financial
advice, and lack of information about important aspects of the
relationship between particular firms and their customers or
clients,\1000\ may harm retail investors by deterring them from seeking
brokerage or investment advisory services even if they could
potentially benefit from it,\1001\ or by increasing the risk of a
mismatch between the investors' preferences and expectations and the
actual brokerage or advisory services they receive from a firm or
professional.\1002\ To ameliorate this potential harm, the relationship
summary is intended to reduce investor confusion and search costs in
the process of (i) deciding whether to engage a particular firm or
financial professional, (ii) whether to establish an investment
advisory or brokerage relationship, and (iii) whether to terminate or
switch the relationship or specific service provided. The relationship
summary is expected to provide significant benefit to retail investors
by focusing their attention on salient features of their potential
relationship with a particular broker-dealer or investment adviser and
highlighting the most important elements of this relationship in a
single, succinct, and easy-to-understand document. The relationship
summary also allows for comparability among broker-dealers and
investment advisers by requiring disclosures on the same topics under
standardized headings in a prescribed order to retail investors.\1003\
As we discuss above in Section I, we do not believe that existing
disclosures provide this level of transparency and comparability across
investment advisers, broker-dealers, and dual registrants.
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    \999\ See supra Section IV.B.
    \1000\ Examples of such aspects of the relationship include the
services and fees of particular firms, and conflicts of interest
that may arise between particular firms and customers or clients.
    \1001\ The potential loss to investors with low financial
literacy from not seeking advice is illustrated by, e.g., the study
by Hans-Martin von Gaudecker, How Does Household Portfolio
Diversification Vary with Financial Literacy and Financial Advice?,
70 J. Fin. 489 (2015), which showed that investors with low
financial literacy that do not seek financial advice on average