[Federal Register Volume 83, Number 90 (Wednesday, May 9, 2018)]
[Proposed Rules]
[Pages 21203-21214]
[FR Doc No: 2018-08679]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release No. IA-4889; File No. S7-09-18]
RIN 3235-AM36

Proposed Commission Interpretation Regarding Standard of Conduct
for Investment Advisers; Request for Comment on Enhancing Investment
Adviser Regulation

AGENCY: Securities and Exchange Commission.

ACTION: Proposed interpretation; request for comment.

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SUMMARY: The Securities and Exchange Commission (the ``SEC'' or the
``Commission'') is publishing for comment a proposed interpretation of
the standard of conduct for investment

advisers under the Investment Advisers Act of 1940 (the ``Advisers
Act'' or the ``Act''). The Commission also is requesting comment on:
Licensing and continuing education requirements for personnel of SEC-
registered investment advisers; delivery of account statements to
clients with investment advisory accounts; and financial responsibility
requirements for SEC-registered investment advisers, including fidelity
bonds.

DATES: Comments should be received on or before August 7, 2018.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/interp.shtml); or
     Send an email to [email protected]. Please include
File Number S7-09-18 on the subject line.

Paper Comments

     Send paper comments to Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-09-18. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (http://www.sec.gov/rules/interp.shtml).
Comments also are available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make publicly available.
    Studies, memoranda or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Jennifer Songer, Senior Counsel, or
Sara Cortes, Assistant Director, at<PHONE_NUMBER> or [email protected],
Investment Adviser Regulation Office, Division of Investment
Management, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is publishing for comment a
proposed interpretation of the standard of conduct for investment
advisers under the Advisers Act [15 U.S.C. 80b].\1\
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    \1\ 15 U.S.C. 80b. Unless otherwise noted, when we refer to the
Advisers Act, or any paragraph of the Advisers Act, we are referring
to 15 U.S.C. 80b of the United States Code, at which the Advisers
Act is codified, and when we refer to rules under the Advisers Act,
or any paragraph of these rules, we are referring to title 17, part
275 of the Code of Federal Regulations [17 CFR 275], in which these
rules are published.
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Table of Contents

II. Investment Advisers' Fiduciary Duty
    A. Duty of Care
    i. Duty To Provide Advice That Is in the Client's Best Interest
    ii. Duty To Seek Best Execution
    iii. Duty To Act and To Provide Advice and Monitoring Over the
Course of the Relationship
    B. Duty of Loyalty
    C. Request for Comment
III. Economic Considerations
    A. Background
    B. Economic Impacts
IV. Request for Comment Regarding Areas of Enhanced Investment
Adviser Regulation
    A. Federal Licensing and Continuing Education
    B. Provision of Account Statements
    C. Financial Responsibility

I. Introduction

    An investment adviser is a fiduciary, and as such is held to the
highest standard of conduct and must act in the best interest of its
client.\2\ Its fiduciary obligation, which includes an affirmative duty
of utmost good faith and full and fair disclosure of all material
facts, is established under federal law and is important to the
Commission's investor protection efforts.\3\ The Commission also
regulates broker-dealers, including the obligations that broker-dealers
owe to their customers. Investment advisers and broker-dealers provide
advice and services to retail investors and are important to our
capital markets and our economy more broadly. Broker-dealers and
investment advisers have different types of relationships with their
customers and clients and have different models for providing advice,
which provide investors with choice about the levels and types of
advice they receive and how they pay for the services that they
receive.
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    \2\ SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180,
194 (1963) (``SEC v. Capital Gains''). See also infra notes 26-32
and accompanying text; Investment Adviser Codes of Ethics,
Investment Advisers Act Release No. 2256 (July 2, 2004); Compliance
Programs of Investment Companies and Investment Advisers, Investment
Advisers Act Release No. 2204 (Dec. 17, 2003) (``Compliance Programs
Release''); Electronic Filing by Investment Advisers; Proposed
Amendments to Form ADV, Investment Advisers Act Release No. 1862
(Apr. 5, 2000). We acknowledge that investment advisers also have
antifraud liability with respect to prospective clients under
section 206 of the Advisers Act.
    \3\ See SEC v. Capital Gains, supra note 2.
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    Today, the Commission is proposing a rule that would require all
broker-dealers and natural persons who are associated persons of
broker-dealers to act in the best interest of retail customers \4\ when
making a recommendation of any securities transaction or investment
strategy involving securities to retail customers (``Regulation Best
Interest'').\5\ We are also proposing to require registered investment
advisers and registered broker-dealers to deliver to retail investors a
relationship summary, which would provide these investors with
information about the relationships and services the firm offers, the
standard of conduct and the fees and costs associated with those
services, specified conflicts of interest, and whether the firm and its
financial professionals currently have reportable legal or disciplinary
events.\6\ In light of the comprehensive nature of our proposed set of
rulemakings, we believe it would be appropriate and beneficial to
address in one release \7\ and reaffirm--and in some cases clarify--
certain aspects of the fiduciary duty that an investment adviser owes
to its clients under section 206 of the Advisers Act.\8\
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    \4\ An investment adviser has a fiduciary duty to all of its
clients, whether or not the client is a retail investor.
    \5\ Regulation Best Interest, Exchange Act Release No. 34-83062
(April 18, 2018) (``Regulation Best Interest Proposal'').
    \6\ Form CRS Relationship Summary; Amendments to Form ADV;
Required Disclosures in Retail Communications and Restrictions on
the use of Certain Names or Titles, Investment Advisers Act Release
No. IA-4888 (April 18, 2018) (``Form CRS Proposal'').
    \7\ This Release is intended to highlight the principles
relevant to an adviser's fiduciary duty. It is not, however,
intended to be the exclusive resource for understanding these
principles.
    \8\ The Commission recognizes that many advisers provide
impersonal investment advice. See, e.g., Advisers Act rule 203A-3
(defining ``impersonal investment advice'' in the context of
defining ``investment adviser representative'' as ``investment
advisory services provided by means of written material or oral
statements that do not purport to meet the objectives or needs of
specific individuals or accounts''). This Release does not address
the extent to which the Advisers Act applies to different types of
impersonal investment advice.
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    An investment adviser's fiduciary duty is similar to, but not the
same as, the proposed obligations of broker-

dealers under Regulation Best Interest.\9\ While we are not proposing a
uniform standard of conduct for broker-dealers and investment advisers
in light of their different relationship types and models for providing
advice, we continue to consider whether we can improve protection of
investors through potential enhancements to the legal obligations of
investment advisers. Below, in addition to our interpretation of
advisers' existing fiduciary obligations, we request comment on three
potential enhancements to their legal obligations by considering areas
where the current broker-dealer framework provides investor protections
that may not have counterparts in the investment adviser context.
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    \9\ Regulation Best Interest Proposal, supra note 5. In addition
to the obligations proposed in Regulation Best Interest, broker-
dealers have a variety of existing specific obligations, including,
among others, suitability, best execution, and fair and reasonable
compensation. See, e.g., Hanly v. SEC, 415 F.2d 589, 596-97 (2d Cir.
1969) (``A securities dealer occupies a special relationship to a
buyer of securities in that by his position he implicitly represents
that he has an adequate and reasonable basis for the opinions he
renders.''); and FINRA rules 2111 (Suitability), 5310 (Best
Execution and Interpositioning), and 2121 (Fair Prices and
Commissions)).
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II. Investment Advisers' Fiduciary Duty

    The Advisers Act establishes a federal fiduciary standard for
investment advisers.\10\ This fiduciary standard is based on equitable
common law principles and is fundamental to advisers' relationships
with their clients under the Advisers Act.\11\ The fiduciary duty to
which advisers are subject is not specifically defined in the Advisers
Act or in Commission rules, but reflects a Congressional recognition
``of the delicate fiduciary nature of an investment advisory
relationship'' as well as a Congressional intent to ``eliminate, or at
least to expose, all conflicts of interest which might incline an
investment adviser--consciously or unconsciously--to render advice
which was not disinterested.'' \12\ An adviser's fiduciary duty is
imposed under the Advisers Act in recognition of the nature of the
relationship between an investment adviser and a client and the desire
``so far as is presently practicable to eliminate the abuses'' that led
to the enactment of the Advisers Act.\13\ It is made enforceable by the
antifraud provisions of the Advisers Act.\14\
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    \10\ Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11,
17 (1979) (``Transamerica Mortgage v. Lewis'') (``Sec.  206
establishes federal fiduciary standards to govern the conduct of
investment advisers.'') (quotation marks omitted); Santa Fe
Industries, Inc. v. Green, 430 U.S. 462, 471, n.11 (1977) (in
discussing SEC v. Capital Gains, stating that the Supreme Court's
reference to fraud in the ``equitable'' sense of the term was
``premised on its recognition that Congress intended the Investment
Advisers Act to establish federal fiduciary standards for investment
advisers''); SEC v. Capital Gains, supra note 2; Amendments to Form
ADV, Investment Advisers Act Release No. 3060 (July 28, 2010)
(``Investment Advisers Act Release 3060'') (``Under the Advisers
Act, an adviser is a fiduciary whose duty is to serve the best
interests of its clients, which includes an obligation not to
subrogate clients' interests to its own,'' citing Proxy Voting by
Investment Advisers, Investment Advisers Act Release No. 2106 (Jan.
31, 2003) (``Investment Advisers Act Release 2106'')).
    \11\ See SEC v. Capital Gains, supra note 2 (discussing the
history of the Advisers Act, and how equitable principles influenced
the common law of fraud and changed the suits brought against a
fiduciary, ``which Congress recognized the investment adviser to
be'').
    \12\ See SEC v. Capital Gains, supra note 2.
    \13\ See SEC v. Capital Gains, supra note 2 (``The Advisers Act
thus reflects a congressional recognition `of the delicate fiduciary
nature of an investment advisory relationship,' as well as a
congressional intent to eliminate, or at least to expose, all
conflicts of interest which might incline an investment adviser--
consciously or unconsciously--to render advice which was not
disinterested.'' and also noting that the ``declaration of policy''
in the original bill, which became the Advisers Act, declared that
``the national public interest and the interest of investors are
adversely affected when the business of investment advisers is so
conducted as to defraud or mislead investors, or to enable such
advisers to relieve themselves of their fiduciary obligations to
their clients. It [sic] is hereby declared that the policy and
purposes of this title, in accordance with which the provisions of
this title shall be interpreted, are to mitigate and, so far as is
presently practicable to eliminate the abuses enumerated in this
section'' (citing S. 3580, 76th Cong., 3d Sess., Sec.  202 and
Investment Trusts and Investment Companies, Report of the Securities
and Exchange Commission, Pursuant to Section 30 of the Public
Utility Holding Company Act of 1935, on Investment Counsel,
Investment Management, Investment Supervisory, and Investment
Advisory Services, H.R. Doc. No. 477, 76th Cong. 2d Sess., 1, at
28). See also In the Matter of Arleen W. Hughes, Exchange Act
Release No. 4048 (Feb. 18, 1948) (``Arleen Hughes'') (discussing the
relationship of trust and confidence between the client and a dual
registrant and stating that the registrant was a fiduciary and
subject to liability under the antifraud provisions of the
Securities Act of 1933 and the Securities Exchange Act).
    \14\ SEC v. Capital Gains, supra note 2; Transamerica Mortgage
v. Lewis, supra note 10 (``[T]he Act's legislative history leaves no
doubt that Congress intended to impose enforceable fiduciary
obligations.'').
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    An investment adviser's fiduciary duty under the Advisers Act
comprises a duty of care and a duty of loyalty. Several commenters
responding to Chairman Clayton's June 2017 request for public input
\15\ on the standards of conduct for investment advisers and broker-
dealers acknowledged these duties.\16\ This fiduciary duty requires an
adviser ``to adopt the principal's goals, objectives, or ends.'' \17\
This means the adviser must, at all times, serve the best interest of
its clients and not subordinate its clients' interest to its own.\18\
The federal fiduciary duty is imposed through the antifraud provisions
of the Advisers Act.\19\ The duty follows the contours of the
relationship between the adviser and its client, and the adviser and
its client may shape that relationship through contract when the client
receives full and fair disclosure and provides informed consent.\20\
Although the ability to tailor the terms means that the application of
the fiduciary duty will vary with the terms of the relationship, the
relationship in all cases remains that of a fiduciary to a client. In
other words, the investment adviser cannot disclose or negotiate away,
and the investor cannot waive, the federal fiduciary

duty.\21\ We discuss our views \22\ on an investment adviser's
fiduciary duty in more detail below.\23\
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    \15\ Public Comments from Retail Investors and Other Interested
Parties on Standards of Conduct for Investment Advisers and Broker-
Dealers, Chairman Jay Clayton (June 1, 2017), available at https://www.sec.gov/news/public-statement/statement-chairman-clayton-2017-05-31 (``Chairman Clayton's Request for Public Input'').
    \16\ See, e.g., Comment letter of the Investment Adviser
Association (Aug. 31, 2017) (``IAA Letter'') (``The well-established
fiduciary duty under the Advisers Act, which incorporates both a
duty of loyalty and a duty of care, has been applied consistently
over the years by courts and the SEC.''); Comment letter of the
Consumer Federation of America (Sept. 14, 2017) (``an adviser's
fiduciary obligation `divides neatly into the duty of loyalty and
the duty of care.' The duty of loyalty is designed to protect
against `malfeasance,' or wrongdoing, on the part of the adviser,
while the duty of care is designed to protect against `nonfeasance,'
such as neglect.'').
    \17\ Arthur B. Laby, The Fiduciary Obligations as the Adoption
of Ends, 56 Buffalo Law Review 99 (2008). See also Restatement
(Third) of Agency, Sec.  2.02 Scope of Actual Authority (2006)
(describing a fiduciary's authority in terms of the fiduciary's
reasonable understanding of the principal's manifestations and
objectives).
    \18\ Investment Advisers Act Release 3060, supra footnote 10
(adopting amendments to Form ADV and stating that ``under the
Advisers Act, an adviser is a fiduciary whose duty is to serve the
best interests of its clients, which includes an obligation not to
subrogate clients' interests to its own,'' citing Investment
Advisers Act Release 2106 supra note 10); SEC v. Tambone, 550 F.3d
106, 146 (1st Cir. 2008) (``Section 206 imposes a fiduciary duty on
investment advisers to act at all times in the best interest of the
fund and its investors.''); SEC v. Moran, 944 F. Supp. 286 (S.D.N.Y
1996) (``Investment advisers are entrusted with the responsibility
and duty to act in the best interest of their clients.'').
    \19\ See supra note 14.
    \20\ See infra note 40 and accompanying text for a discussion of
informed consent.
    \21\ As an adviser's federal fiduciary obligations are
enforceable through section 206 of the Act, we would view a waiver
of enforcement of section 206 as implicating section 215(a) of the
Act, which provides that ``any condition, stipulation or provision
binding any person to waive compliance with any provision of this
title . . . shall be void.'' Some commenters on Chairman Clayton's
Request for Public Input and other Commission requests for comment
also stated that an adviser's fiduciary duty could not be disclosed
away. See, e.g., IAA Letter supra note 16 (``While disclosure of
conflicts is crucial, it cannot take the place of the overarching
duty of loyalty. In other words, an adviser is still first and
foremost bound by its duty to act in its client's best interest and
disclosure does not relieve an adviser of this duty.''); Comment
letter of AARP (Sept. 6, 2017) (``Disclosure and consent alone do
not meet the fiduciary test.''); Financial Planning Coalition Letter
(July 5, 2013) responding to SEC Request for Data and Other
Information, Duties of Brokers, Dealers, and Investment Advisers,
Exchange Act Release No. 69013 (Mar. 1, 2013) (``Financial Planning
Coalition 2013 Letter'') (``[D]isclosure alone is not sufficient to
discharge an investment adviser's fiduciary duty; rather, the key
issue is whether the transaction is in the best interest of the
client.'') (internal citations omitted). See also Restatement
(Third) of Agency, Sec.  8.06 Principal's Consent (2006) (``The law
applicable to relationships of agency as defined in Sec.  1.01
imposes mandatory limits on the circumstances under which an agent
may be empowered to take disloyal action. These limits serve
protective and cautionary purposes. Thus, an agreement that contains
general or broad language purporting to release an agent in advance
from the agent's general fiduciary obligation to the principal is
not likely to be enforceable. This is because a broadly sweeping
release of an agent's fiduciary duty may not reflect an adequately
informed judgment on the part of the principal; if effective, the
release would expose the principal to the risk that the agent will
exploit the agent's position in ways not foreseeable by the
principal at the time the principal agreed to the release. In
contrast, when a principal consents to specific transactions or to
specified types of conduct by the agent, the principal has a focused
opportunity to assess risks that are more readily identifiable.'');
Tamar Frankel, Arthur Laby & Ann Schwing, The Regulation of Money
Managers, (updated 2017) (``The Regulation of Money Managers'')
(``Disclosure may, but will not always, cure the fraud, since a
fiduciary owes a duty to deal fairly with clients.'').
    \22\ In various circumstances, other regulators, including the
U.S. Department of Labor, and other legal regimes, including state
securities law, impose obligations on investment advisers. In some
cases, these standards may differ from the standard imposed and
enforced by the Commission.
    \23\ The interpretations discussed in this Release also apply to
automated advisers, which are often colloquially referred to as
``robo-advisers.'' Robo-advisers, like all SEC-registered investment
advisers, are subject to all of the requirements of the Advisers
Act, including the requirement that they provide advice consistent
with the fiduciary duty they owe to their clients. The staff of the
Commission has issued guidance regarding how robo-advisers can meet
their obligations under the Advisers Act, given the unique
challenges and opportunities presented by their business models. See
Division of Investment Management, SEC, Staff Guidance on Robo
Advisers, (February 2017), available at https://www.sec.gov/investment/im-guidance-2017-02.pdf.
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A. Duty of Care

    As fiduciaries, investment advisers owe their clients a duty of
care.\24\ The Commission has discussed the duty of care and its
components in a number of contexts.\25\ The duty of care includes,
among other things: (i) The duty to act and to provide advice that is
in the best interest of the client, (ii) the duty to seek best
execution of a client's transactions where the adviser has the
responsibility to select broker-dealers to execute client trades, and
(iii) the duty to provide advice and monitoring over the course of the
relationship.
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    \24\ See Investment Advisers Act Release No. 2106, supra note 10
(stating that under the Advisers Act, ``an adviser is a fiduciary
that owes each of its clients duties of care and loyalty with
respect to all services undertaken on the client's behalf, including
proxy voting,'' which is the subject of the release, and citing SEC
v. Capital Gains supra note 2, to support this point). See also
Restatement (Third) of Agency, Sec.  8.08 (discussing the duty of
care that an agent owes its principal as a matter of common law);
The Regulation of Money Managers, supra note 21 (``Advice can be
divided into three stages. The first determines the needs of the
particular client. The second determines the portfolio strategy that
would lead to meeting the client's needs. The third relates to the
choice of securities that the portfolio would contain. The duty of
care relates to each of the stages and depends on the depth or
extent of the advisers' obligation towards their clients.'').
    \25\ See, e.g., Suitability of Investment Advice Provided by
Investment Advisers; Custodial Account Statements for Certain
Advisory Clients, Investment Advisers Act Release No. 1406 (Mar. 16,
1994) (``Investment Advisers Act Release 1406'') (stating that
advisers have a duty of care and discussing advisers' suitability
obligations); Securities; Brokerage and Research Services, Exchange
Act Release No. 23170 (Apr. 23, 1986) (``Exchange Act Release
23170'') (``an adviser, as a fiduciary, owes its clients a duty of
obtaining the best execution on securities transactions.''). We
highlight certain contexts in which the Commission has addressed the
duty of care but we note that there are others; for example, voting
proxies when an adviser undertakes to do so. Investment Advisers Act
Release 2106, supra note 10.
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i. Duty To Provide Advice That Is in the Client's Best Interest
    We have addressed an adviser's duty of care in the context of the
provision of personalized investment advice. In this context, the duty
of care includes a duty to make a reasonable inquiry into a client's
financial situation, level of financial sophistication, investment
experience, and investment objectives (which we refer to collectively
as the client's ``investment profile'') and a duty to provide
personalized advice that is suitable for and in the best interest of
the client based on the client's investment profile.\26\
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    \26\ In 1994, the Commission proposed a rule that would make
express the fiduciary obligation of investment advisers to make only
suitable recommendations to a client. Investment Advisers Act
Release 1406, supra note 25. Although never adopted, the rule was
designed, among other things, to reflect the Commission's
interpretation of an adviser's existing suitability obligation under
the Advisers Act. We believe that this obligation, when combined
with an adviser's fiduciary duty to act in the best interest of its
client, requires an adviser to provide investment advice that is
suitable for and in the best interest of its client.
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    An adviser must, before providing any personalized investment
advice and as appropriate thereafter, make a reasonable inquiry into
the client's investment profile. The nature and extent of the inquiry
turn on what is reasonable under the circumstances, including the
nature and extent of the agreed-upon advisory services, the nature and
complexity of the anticipated investment advice, and the investment
profile of the client. For example, to formulate a comprehensive
financial plan for a client, an adviser might obtain a range of
personal and financial information about the client, including current
income, investments, assets and debts, marital status, insurance
policies, and financial goals.\27\
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    \27\ Investment Advisers Act Release 1406, supra note 25. After
making a reasonable inquiry into the client's investment profile, it
generally would be reasonable for an adviser to rely on information
provided by the client (or the client's agent) regarding the
client's financial circumstances, and an adviser should not be held
to have given advice not in its client's best interest if it is
later shown that the client had misled the adviser.
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    An adviser must update a client's investment profile in order to
adjust its advice to reflect any changed circumstances.\28\ The
frequency with which the adviser must update the information in order
to consider changes to any advice the adviser provides would turn on
many factors, including whether the adviser is aware of events that
have occurred that could render inaccurate or incomplete the investment
profile on which it currently bases its advice. For example, a change
in the relevant tax law or knowledge that the client has retired or
experienced a change in marital status might trigger an obligation to
make a new inquiry.
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    \28\ We note that this would not be done for a one-time
financial plan or other investment advice that is not provided on an
ongoing basis. See also infra note 37.
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    An investment adviser must also have a reasonable belief that the
personalized advice is suitable for and in the best interest of the
client based on the client's investment profile. A reasonable belief
would involve considering, for example, whether investments are
recommended only to those clients who can and are willing to tolerate
the risks of those investments and for whom the potential benefits may
justify the risks.\29\

Whether the advice is in a client's best interest must be evaluated in
the context of the portfolio that the adviser manages for the client
and the client's investment profile. For example, when an adviser is
advising a client with a conservative investment objective, investing
in certain derivatives may be in the client's best interest when they
are used to hedge interest rate risk in the client's portfolio, whereas
investing in certain directionally speculative derivatives on their own
may not. For that same client, investing in a particular security on
margin may not be in the client's best interest, even if investing in
that same security may be in the client's best interest. When advising
a financially sophisticated investor with a high risk tolerance,
however, it may be consistent with the adviser's duties to recommend
investing in such directionally speculative derivatives or investing in
securities on margin.
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    \29\ We note that Item 8 of Part 2A of Form ADV requires an
investment adviser to describe its methods of analysis and
investment strategies and disclose that investing in securities
involves risk of loss which clients should be prepared to bear. This
item also requires that an adviser explain the material risks
involved for each significant investment strategy or method of
analysis it uses and particular type of security it recommends, with
more detail if those risks are significant or unusual.
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    The cost (including fees and compensation) associated with
investment advice would generally be one of many important factors--
such as the investment product's or strategy's investment objectives,
characteristics (including any special or unusual features), liquidity,
risks and potential benefits, volatility and likely performance in a
variety of market and economic conditions--to consider when determining
whether a security or investment strategy involving a security or
securities is in the best interest of the client. Accordingly, the
fiduciary duty does not necessarily require an adviser to recommend the
lowest cost investment product or strategy. We believe that an adviser
could not reasonably believe that a recommended security is in the best
interest of a client if it is higher cost than a security that is
otherwise identical, including any special or unusual features,
liquidity, risks and potential benefits, volatility and likely
performance. For example, if an adviser advises its clients to invest
in a mutual fund share class that is more expensive than other
available options when the adviser is receiving compensation that
creates a potential conflict and that may reduce the client's return,
the adviser may violate its fiduciary duty and the antifraud provisions
of the Advisers Act if it does not, at a minimum, provide full and fair
disclosure of the conflict and its impact on the client and obtain
informed client consent to the conflict.\30\ Furthermore, an adviser
would not satisfy its fiduciary duty to provide advice that is in the
client's best interest by simply advising its client to invest in the
least expensive or least remunerative investment product or strategy
without any further analysis of other factors in the context of the
portfolio that the adviser manages for the client and the client's
investment profile. For example, it might be consistent with an
adviser's fiduciary duty to advise a client with a high risk tolerance
and significant investment experience to invest in a private equity
fund with relatively high fees if other factors about the fund, such as
its diversification and potential performance benefits, cause it to be
in the client's best interest. We believe that a reasonable belief that
investment advice is in the best interest of a client also requires
that an adviser conduct a reasonable investigation into the investment
sufficient to not base its advice on materially inaccurate or
incomplete information.\31\ We have brought enforcement actions where
an investment adviser did not independently or reasonably investigate
securities before recommending them to clients.\32\ This obligation to
provide advice that is suitable and in the best interest applies not
just to potential investments, but to all advice the investment adviser
provides to clients, including advice about an investment strategy or
engaging a sub-adviser and advice about whether to rollover a
retirement account so that the investment adviser manages that account.
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    \30\ See infra notes 48-52 and accompanying text (discussing an
adviser's duties related to disclosure and consent).
    \31\ See, e.g., Concept Release on the U.S. Proxy System,
Investment Advisers Act Release No. 3052 (July 14, 2010) (stating
``as a fiduciary, the proxy advisory firm has a duty of care
requiring it to make a reasonable investigation to determine that it
is not basing its recommendations on materially inaccurate or
incomplete information'').
    \32\ See In the Matter of Larry C. Grossman, Investment Advisers
Act Release No. 4543 (Sept. 30, 2016) (Commission opinion) (imposing
liability on a principal of a registered investment adviser for
recommending offshore private investment funds to clients without a
reasonable independent basis for his advice).
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ii. Duty To Seek Best Execution
    We have addressed an investment adviser's duty of care in the
context of trade execution where the adviser has the responsibility to
select broker-dealers to execute client trades (typically in the case
of discretionary accounts). We have said that, in this context, an
adviser has the duty to seek best execution of a client's
transactions.\33\ In meeting this obligation, an adviser must seek to
obtain the execution of transactions for each of its clients such that
the client's total cost or proceeds in each transaction are the most
favorable under the circumstances. An adviser fulfills this duty by
executing securities transactions on behalf of a client with the goal
of maximizing value for the client under the particular circumstances
occurring at the time of the transaction. As noted below, maximizing
value can encompass more than just minimizing cost. When seeking best
execution, an adviser should consider ``the full range and quality of a
broker's services in placing brokerage including, among other things,
the value of research provided as well as execution capability,
commission rate, financial responsibility, and responsiveness'' to the
adviser.\34\ In other words, the determinative factor is not the lowest
possible commission cost but whether the transaction represents the
best qualitative execution. Further, an investment adviser should
``periodically and systematically'' evaluate the execution it is
receiving for clients.\35\
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    \33\ See Commission Guidance Regarding Client Commission
Practices Under Section 28(e) of the Securities Exchange Act of
1934, Exchange Act Release No. 54165 (July 18, 2006) (stating that
investment advisers have ``best execution obligations''); Investment
Advisers Act Release 3060, supra note 10 (discussing an adviser's
best execution obligations in the context of directed brokerage
arrangements and disclosure of soft dollar practices). See also
Advisers Act rule 206(3)-2(c) (referring to adviser's duty of best
execution of client transactions).
    \34\ Exchange Act Release 23170, supra note 25.
    \35\ Id. The Advisers Act does not prohibit advisers from using
an affiliated broker to execute client trades. However, the
adviser's use of such an affiliate involves a conflict of interest
that must be fully and fairly disclosed and the client must provide
informed consent to the conflict.
---------------------------------------------------------------------------

iii. Duty To Act and To Provide Advice and Monitoring Over the Course
of the Relationship
    An investment adviser's duty of care also encompasses the duty to
provide advice and monitoring over the course of a relationship with a
client.\36\ An

adviser is required to provide advice and services to a client over the
course of the relationship at a frequency that is both in the best
interest of the client and consistent with the scope of advisory
services agreed upon between the investment adviser and the client. The
duty to provide advice and monitoring is particularly important for an
adviser that has an ongoing relationship with a client (for example, a
relationship where the adviser is compensated with a periodic asset-
based fee or an adviser with discretionary authority over client
assets). Conversely, the steps needed to fulfill this duty may be
relatively circumscribed for the adviser and client that have agreed to
a relationship of limited duration via contract (for example, a
financial planning relationship where the adviser is compensated with a
fixed, one-time fee commensurate with the discrete, limited-duration
nature of the advice provided).\37\ An adviser's duty to monitor
extends to all personalized advice it provides the client, including an
evaluation of whether a client's account or program type (for example,
a wrap account) continues to be in the client's best interest.
---------------------------------------------------------------------------

    \36\ See SEC v. Capital Gains, supra note 2 (describing
advisers' ``basic function'' as ``furnishing to clients on a
personal basis competent, unbiased, and continuous advice regarding
the sound management of their investments'' (quoting Investment
Trusts and Investment Companies, Report of the Securities and
Exchange Commission, Pursuant to Section 30 of the Public Utility
Holding Company Act of 1935, on Investment Counsel, Investment
Management, Investment Supervisory, and Investment Advisory
Services, H.R. Doc. No. 477, 76th Cong. 2d Sess., 1, at 28)). Cf.
Barbara Black, Brokers and Advisers-What's in a Name?, 32 Fordham
Journal of Corporate and Financial Law XI (2005) (``[W]here the
investment adviser's duties include management of the account, [the
adviser] is under an obligation to monitor the performance of the
account and to make appropriate changes in the portfolio.''); Arthur
B. Laby, Fiduciary Obligations of Broker-Dealers and Investment
Advisers, 55 Villanova Law Review 701, at 728 (2010) (``Laby
Villanova Article'') (``If an adviser has agreed to provide
continuous supervisory services, the scope of the adviser's
fiduciary duty entails a continuous, ongoing duty to supervise the
client's account, regardless of whether any trading occurs. This
feature of the adviser's duty, even in a non-discretionary account,
contrasts sharply with the duty of a broker administering a non-
discretionary account, where no duty to monitor is required.'')
(internal citations omitted).
    \37\ See Laby Villanova Article, supra note 36, at 728 (2010)
(stating that the scope of an adviser's activity can be altered by
contract and that an adviser's fiduciary duty would be commensurate
with the scope of the relationship).
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B. Duty of Loyalty

    The duty of loyalty requires an investment adviser to put its
client's interests first. An investment adviser must not favor its own
interests over those of a client or unfairly favor one client over
another.\38\ In seeking to meet its duty of loyalty, an adviser must
make full and fair disclosure to its clients of all material facts
relating to the advisory relationship.\39\ In addition, an adviser must
seek to avoid conflicts of interest with its clients, and, at a
minimum, make full and fair disclosure of all material conflicts of
interest that could affect the advisory relationship. The disclosure
should be sufficiently specific so that a client is able to decide
whether to provide informed consent to the conflict of interest.\40\ We
discuss each of these aspects of the duty of loyalty below.
---------------------------------------------------------------------------

    \38\ See Investment Advisers Act Release 3060 (``Under the
Advisers Act, an adviser is a fiduciary whose duty is to serve the
best interests of its clients, which includes an obligation not to
subrogate clients' interests to its own,'' citing Investment
Advisers Act Release 2106 supra note 9). See also Staff of the U.S.
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
https://www.sec.gov/news/studies/2011/913studyfinal.pdf (``913
Study'').
    \39\ Investment Advisers Act Release 3060, supra note 6 (``as a
fiduciary, an adviser has an ongoing obligation to inform its
clients of any material information that could affect the advisory
relationship''). See also General Instruction 3 to Part 2 of Form
ADV (``Under federal and state law, you are a fiduciary and must
make full disclosure to your clients of all material facts relating
to the advisory relationship.'').
    \40\ Arleen Hughes, supra note 13, at 4 and 8 (stating,
``[s]ince loyalty to his trust is the first duty which a fiduciary
owes to his principal, it is the general rule that a fiduciary must
not put himself into a position where his own interests may come in
conflict with those of his principal. To prevent any conflict and
the possible subordination of this duty to act solely for the
benefit of his principal, a fiduciary at common law is forbidden to
deal as an adverse party with his principal. An exception is made,
however, where the principal gives his informed consent to such
dealings,'' and adding that, ``[r]egistrant has an affirmative
obligation to disclose all material facts to her clients in a manner
which is clear enough so that a client is fully apprised of the
facts and is in a position to give his informed consent.''). See
also Hughes v. Securities and Exchange Commission, 174 F.2d 969
(1949) (affirming the SEC decision in Arleen Hughes).
    See also General Instruction 3 to Part 2 of Form ADV (stating
that an adviser's disclosure obligation ``requires that [the
adviser] provide the client with sufficiently specific facts so that
the client is able to understand the conflicts of interest [the
adviser has] and the business practices in which [the adviser]
engage[s], and can give informed consent to such conflicts or
practices or reject them''); Investment Advisers Act Release 3060,
supra note 10 (same); Restatement (Third) of Agency Sec.  8.06
(``Conduct by an agent that would otherwise constitute a breach of
duty as stated in Sec. Sec.  8.01, 8.02, 8.03, 8.04, and 8.05
[referencing the fiduciary duty] does not constitute a breach of
duty if the principal consents to the conduct, provided that (a) in
obtaining the principal's consent, the agent (i) acts in good faith,
(ii) discloses all material facts that the agent knows, has reason
to know, or should know would reasonably affect the principal's
judgment unless the principal has manifested that such facts are
already known by the principal or that the principal does not wish
to know them, and (iii) otherwise deals fairly with the principal;
and (b) the principal's consent concerns either a specific act or
transaction, or acts or transactions of a specified type that could
reasonably be expected to occur in the ordinary course of the agency
relationship'').
---------------------------------------------------------------------------

    Because an adviser must serve the best interests of its clients, it
has an obligation not to subordinate its clients' interests to its own.
For example, an adviser cannot favor its own interests over those of a
client, whether by favoring its own accounts or by favoring certain
client accounts that pay higher fee rates to the adviser over other
client accounts.\41\ Accordingly, the duty of loyalty includes a duty
not to treat some clients favorably at the expense of other clients.
Thus, we believe that in allocating investment opportunities among
eligible clients, an adviser must treat all clients fairly.\42\ This
does not mean that an adviser must have a pro rata allocation policy,
that the adviser's allocation policies cannot reflect the differences
in clients' objectives or investment profiles, or that the adviser
cannot exercise judgment in allocating investment opportunities among
eligible clients. Rather, it means that an adviser's allocation
policies must be fair and, if they present a conflict, the adviser must
fully and fairly disclose the conflict such that a client can provide
informed consent.
---------------------------------------------------------------------------

    \41\ The Commission has brought numerous enforcement actions
against advisers that unfairly allocated trades to their own
accounts and allocated less favorable or unprofitable trades to
their clients' accounts. See, e.g., SEC v. Strategic Capital
Management, LLC and Michael J. Breton, Litigation Release No. 23867
(June 23, 2017) (partial settlement) (adviser placed trades through
a master brokerage account and then allocated profitable trades to
adviser's account while placing unprofitable trades into the client
accounts.).
    \42\ See also Barry Barbash and Jai Massari, The Investment
Advisers Act of 1940; Regulation by Accretion, 39 Rutgers Law
Journal 627 (2008) (stating that under section 206 of the Advisers
Act and traditional notions of fiduciary and agency law an adviser
must not give preferential treatment to some clients or
systematically exclude eligible clients from participating in
specific opportunities without providing the clients with
appropriate disclosure regarding the treatment).
---------------------------------------------------------------------------

    An adviser must seek to avoid conflicts of interest with its
clients, and, at a minimum, make full and fair disclosure to its
clients of all material conflicts of interest that could affect the
advisory relationship.\43\ Disclosure of a conflict alone is not always
sufficient to satisfy the adviser's duty of loyalty and section 206 of
the Advisers Act.\44\ Any

disclosure must be clear and detailed enough for a client to make a
reasonably informed decision to consent to such conflicts and practices
or reject them.\45\ An adviser must provide the client with
sufficiently specific facts so that the client is able to understand
the adviser's conflicts of interest and business practices well enough
to make an informed decision.\46\ For example, an adviser disclosing
that it ``may'' have a conflict is not adequate disclosure when the
conflict actually exists.\47\ A client's informed consent can be either
explicit or, depending on the facts and circumstances, implicit. We
believe, however, that it would not be consistent with an adviser's
fiduciary duty to infer or accept client consent to a conflict where
either (i) the facts and circumstances indicate that the client did not
understand the nature and import of the conflict, or (ii) the material
facts concerning the conflict could not be fully and fairly
disclosed.\48\ For example, in some cases, conflicts may be of a nature
and extent that it would be difficult to provide disclosure that
adequately conveys the material facts or the nature, magnitude and
potential effect of the conflict necessary to obtain informed consent
and satisfy an adviser's fiduciary duty. In other cases, disclosure may
not be specific enough for clients to understand whether and how the
conflict will affect the advice they receive. With some complex or
extensive conflicts, it may be difficult to provide disclosure that is
sufficiently specific, but also understandable, to the adviser's
clients. In all of these cases where full and fair disclosure and
informed consent is insufficient, we expect an adviser to eliminate the
conflict or adequately mitigate the conflict so that it can be more
readily disclosed.
---------------------------------------------------------------------------

    \43\ See SEC v. Capital Gains, supra note 2 (advisers must fully
disclose all material conflicts, citing Congressional intent ``to
eliminate, or at least expose, all conflicts of interest which might
incline an investment adviser--consciously or unconsciously--to
render advice which was not disinterested''). See also Investment
Advisers Act Release 3060, supra note 9.
    \44\ See SEC v. Capital Gains, supra note 2 (in discussing the
legislative history of the Advisers Act, citing ethical standards of
one of the leading investment counsel associations, which provided
that an investment counsel should remain ``as free as humanly
possible from the subtle influence of prejudice, conscious or
unconscious'' and ``avoid any affiliation, or any act which subjects
his position to challenge in this respect'' and stating that one of
the policy purposes of the Advisers Act is ``to mitigate and, so far
as is presently practicable to eliminate the abuses'' that formed
the basis of the Advisers Act). Separate and apart from potential
liability under the antifraud provisions of the Advisers Act
enforceable by the Commission for breaches of fiduciary duty in the
absence of full and fair disclosure, investment advisers may also
wish to consider their potential liability to clients under state
common law, which may vary from state to state.
    \45\ See Arlene Hughes, supra at 13 (in finding that registrant
had not obtained informed consent, citing to testimony indicating
that ``some clients had no understanding at all of the nature and
significance'' of the disclosure).
    \46\ See General Instruction 3 to Part 2 of Form ADV. Cf. Arleen
Hughes, supra note 13 (Hughes acted simultaneously in the dual
capacity of investment adviser and of broker and dealer and conceded
having a fiduciary duty. In describing the fiduciary duty and her
potential liability under the antifraud provisions of the Securities
Act and the Exchange Act, the Commission stated she had ``an
affirmative obligation to disclose all material facts to her clients
in a manner which is clear enough so that a client is fully apprised
of the facts and is in a position to give his informed consent.'').
    \47\ We have brought enforcement actions in such cases. See,
e.g., In the Matter of The Robare Group, Ltd., et al., Investment
Advisers Act Release No. 4566 (Nov. 7, 2016) (Commission Opinion)
(appeal docketed) (finding, among other things, that adviser's
disclosure was inadequate because it stated that the adviser may
receive compensation from a broker as a result of the facilitation
of transactions on client's behalf through such broker-dealer and
that these arrangements may create a conflict of interest when
adviser was, in fact, receiving payments from the broker and had
such a conflict of interest).
    \48\ See Arleen Hughes, supra note 13 (``Registrant cannot
satisfy this duty by executing an agreement with her clients which
the record shows some clients do not understand and which, in any
event, does not contain the essential facts which she must
communicate.'') Some commenters on Commission requests for comment
agreed that full and fair disclosure and informed consent are
important components of an adviser's fiduciary duty. See, e.g.,
Financial Planning Coalition 2013 Letter, supra note 21 (``[C]onsent
is only informed if the customer has the ability fully to understand
and to evaluate the information. Many complex products . . . are
appropriate only for sophisticated and experienced investors. It is
not sufficient for a fiduciary to make disclosure of potential
conflicts of interest with respect to such products. The fiduciary
must make a reasonable judgment that the customer is fully able to
understand and to evaluate the product and the potential conflicts
of interest that it presents--and then the fiduciary must make a
judgment that the product is in the best interests of the
customer.'').
---------------------------------------------------------------------------

    Full and fair disclosure of all material facts that could affect an
advisory relationship, including all material conflicts of interest
between the adviser and the client, can help clients and prospective
clients in evaluating and selecting investment advisers. Accordingly,
we require advisers to deliver to their clients a ``brochure,'' under
Part 2A of Form ADV, which sets out minimum disclosure requirements,
including disclosure of certain conflicts.\49\ Investment advisers are
required to deliver the brochure to a prospective client at or before
entering into a contract so that the prospective client can use the
information contained in the brochure to decide whether or not to enter
into the advisory relationship.\50\ In a concurrent release, we are
proposing to require all investment advisers to deliver to retail
investors before or at the time the adviser enters into an investment
advisory agreement a relationship summary which would include a summary
of certain conflicts of interest.\51\
---------------------------------------------------------------------------

    \49\ Investment Advisers Act Release 3060, supra note 10;
General Instruction 3 to Part 2 of Form ADV (``Under federal and
state law, you are a fiduciary and must make full disclosure to your
clients of all material facts relating to the advisory relationship.
As a fiduciary, you also must seek to avoid conflicts of interest
with your clients, and, at a minimum, make full disclosure of all
material conflicts of interest between you and your clients that
could affect the advisory relationship. This obligation requires
that you provide the client with sufficiently specific facts so that
the client is able to understand the conflicts of interest you have
and the business practices in which you engage, and can give
informed consent to such conflicts or practices or reject them.'').
    \50\ Investment Advisers Act rule 204-3. Investment Advisers Act
Release 3060, supra note 10 (adopting amendments to Form ADV and
stating that ``A client may use this disclosure to select his or her
own adviser and evaluate the adviser's business practices and
conflicts on an ongoing basis. As a result, the disclosure clients
and prospective clients receive is critical to their ability to make
an informed decision about whether to engage an adviser and, having
engaged the adviser, to manage that relationship.'').
    \51\ Form CRS Proposal, supra note 6.
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C. Request for Comment

    The Commission requests comment on our proposed interpretation
regarding certain aspects of the fiduciary duty under section 206 of
the Advisers Act.
     Does the Commission's proposed interpretation offer
sufficient guidance with respect to the fiduciary duty under section
206 of the Advisers Act?
     Are there any significant issues related to an adviser's
fiduciary duty that the proposed interpretation has not addressed?
     Would it be beneficial for investors, advisers or broker-
dealers for the Commission to codify any portion of our proposed
interpretation of the fiduciary duty under section 206 of the Advisers
Act?

III. Economic Considerations

    The Commission is sensitive to the potential economic effects of
the proposed interpretation provided above.\52\ In this section we
discuss how the proposed Commission interpretation may benefit
investors and reduce agency problems by reaffirming and clarifying the
fiduciary duty an investment adviser owes to its clients. We also
discuss some potential broader economic effects on the market for
investment advice.
---------------------------------------------------------------------------

    \52\ The Commission, where possible, has sought to quantify the
economic impacts expected to result from the proposed
interpretations. However, as discussed more specifically below, the
Commission is unable to quantify certain of the economic effects
because it lacks information necessary to provide reasonable
estimates.
---------------------------------------------------------------------------

A. Background

    The Commission's interpretation of the standard of conduct for
investment advisers under the Advisers Act set forth in this Release
would affect investment advisers and their associated persons as well
as the clients of those investment advisers, and the market for
financial advice more broadly.\53\ There are 12,659 investment advisers
registered with the Commission with over $72 trillion in assets under
management as well as 17,635 investment advisers registered with states
and 3,587 investment advisers who submit Form ADV as exempt reporting
advisers.\54\ As of December

2017, there are approximately 36 million client accounts advised by
SEC-registered investment advisers.
---------------------------------------------------------------------------

    \53\ See Form CRS Proposal, supra note 6, at Section IV.A
(discussing the market for financial advice generally).
    \54\ See Form CRS Proposal, supra note 6, at Section IV.A.1.b
(discussing SEC-registered investment advisers). Note, however, that
because we are interpreting advisers' fiduciary duties under section
206 of the Advisers Act, this interpretation would be applicable to
both SEC- and state-registered investment advisers, as well as other
investment advisers that are exempt from registration or subject to
a prohibition on registration under the Advisers Act.
---------------------------------------------------------------------------

    These investment advisers currently incur ongoing costs related to
their compliance with their legal and regulatory obligations, including
costs related to their understanding of the standard of conduct. We
believe, based on the Commission's experience, that the interpretations
we are setting forth in this Release are generally consistent with
investment advisers' current understanding of the practices necessary
to comply with their fiduciary duty under the Advisers Act; however, we
recognize that there may be certain current investment advisers who
have interpreted their fiduciary duty to require something less, or
something more, than the Commission's interpretation. We lack data to
identify which investment advisers currently understand the practices
necessary to comply with their fiduciary duty to be different from the
standard of conduct in the Commission's interpretation. Based on our
experience, however, we generally believe that it is not a significant
portion of the market.

B. Economic Impacts

    Based on our experience as the long-standing regulator of the
investment adviser industry, the Commission's interpretation of the
fiduciary duty under section 206 of the Advisers Act described in this
Release generally reaffirms the current practices of investment
advisers. Therefore, we expect there to be no significant economic
impacts from the interpretation. We do acknowledge, however, to the
extent certain investment advisers currently understand the practices
necessary to comply with their fiduciary duty to be different from
those discussed in this interpretation, there could be some potential
economic effects, which we discuss below.
Clients of Investment Advisers
    The typical relationship between an investment adviser and a client
is a principal-agent relationship, where the principal (the client)
hires an agent (the investment adviser) to perform some service
(investment advisory services) on the client's behalf.\55\ Because
investors and investment advisers are likely to have different
preferences and goals, the investment adviser relationship is subject
to agency problems: That is, investment advisers may take actions that
increase their well-being at the expense of investors, thereby imposing
agency costs on investors.\56\ A fiduciary duty, such as the duty
investment advisers owe their clients, can mitigate these agency
problems and reduce agency costs by deterring agents from taking
actions that expose them to legal liability.\57\
---------------------------------------------------------------------------

    \55\ See, e.g., James A. Brickley, Clifford W. Smith, Jr.,
Jerold L. Zimmerman, Managerial Economics and Organizational
Architecture (2004), at 265 (``An agency relationship consists of an
agreement under which one party, the principal, engages another
party, the agent, to perform some service on the principal's
behalf.''). See also Michael C. Jensen and William H. Meckling,
Theory of the Firm: Managerial Behavior, Agency Costs and Ownership
Structure, Journal of Financial Economics, Vol. 3, 305-360 (1976).
    \56\ See, e.g., Jensen and Meckling, supra note 55. See also the
discussion on agency problems in the market for investment advice in
Section IV.B. of the Regulation Best Interest Proposal, supra note
5.
    \57\ See, e.g., Frank H. Easterbrook and Daniel R. Fischel,
Contract and Fiduciary Duty, Journal of Law & Economics, Vol. 36,
425-46 (1993).
---------------------------------------------------------------------------

    To the extent the Commission's interpretation of investment adviser
fiduciary duty would cause a change in behavior of those investment
advisers, if any, who currently interpret their fiduciary duty to
require something different from the Commission's interpretation, we
expect a potential reduction in agency problems and, consequently, a
reduction of agency costs to the client. The extent to which agency
costs would be reduced is difficult to assess given that we are unable
to ascertain whether any investment advisers currently interpret their
fiduciary duty to be something different from the Commission's
interpretation, and consequently we are not able to estimate the agency
costs these advisers, if any, currently impose on investors. However,
we believe that there may be potential benefits for clients of those
investment advisers, if any, to the extent the Commission's
interpretation is effective at strengthening investment advisers'
understanding of their obligations to their clients. For example, to
the extent that the Commission's interpretation enhances the
understanding of any investment advisers of their duty of care, it may
potentially raise the quality of investment advice given and that
advice's fit with a client's individual profile and preferences or lead
to increased compliance with the duty to provide advice and monitoring
over the course of the relationship.
    Additionally, to the extent the Commission's interpretation
enhances the understanding of any investment advisers of their duty of
loyalty it may potentially benefit the clients of those investment
advisers. Specifically, to the extent this leads to a higher quality of
disclosures about conflicts for clients of some investment advisers,
the nature and extent of such conflict disclosures would help investors
better assess the quality of the investment advice they receive,
therefore providing an important benefit to investors.
    Further, to the extent that the interpretation causes some
investment advisers to properly identify circumstances in which
disclosure alone cannot cure a conflict of interest, the proposed
interpretation may lead those investment advisers to take additional
steps to mitigate or eliminate the conflict. The interpretation may
also cause some investment advisers to conclude in some circumstances
that even if disclosure would be enough to meet their fiduciary duty,
such disclosure would have to be so expansive or complex that they
instead voluntarily mitigate or eliminate the conflicts of interest.
Thus, to the extent the Commission's interpretation would cause
investment advisers to better understand their obligations as part of
their fiduciary duty and therefore to make changes to their business
practices in ways that reduce the likelihood of conflicted advice or
the magnitude of the conflicts, it may ameliorate the agency conflict
between investment advisers and their clients and, in turn, may improve
the quality of advice that the clients receive. This less-conflicted
advice may therefore produce higher overall returns for clients and
increase the efficiency of portfolio allocation. However, as discussed
above, we would generally expect these effects to be minimal. Finally,
this interpretation would also benefit clients of investment advisers
to the extent it assists the Commission in its oversight of investment
advisers' compliance with their regulatory obligations.
Investment Advisers and the Market for Investment Advice
    In general, we expect the Commission's interpretation of an
investment adviser's fiduciary duty would affirm investment advisers'
understanding of the obligations they owe their clients, reduce
uncertainty for advisers, and facilitate their compliance. Furthermore,
by addressing in one release certain aspects of the fiduciary duty that
an investment adviser owes to its clients, the Commission's
interpretation could reduce the costs associated with comprehensively
assessing their compliance obligations. We acknowledge that, as with
other

circumstances in which the Commission speaks to the legal obligations
of regulated entities, affected firms, including those whose practices
are consistent with the Commission's interpretation, incur costs to
evaluate the Commission's interpretation and assess its applicability
to them. Moreover, as discussed above, there may be certain investment
advisers who currently understand the practices necessary to comply
with their fiduciary duty to be different from the standard of conduct
in the Commission's interpretation. Those investment advisers if any,
would experience an increase in their compliance costs as they change
their systems, processes and behavior, and train their supervised
persons, to align with the Commission's interpretation.
    Moreover, to the extent any investment advisers that understood
their fiduciary obligation to be different from the Commission's
interpretation change their behavior to align with this interpretation,
there could potentially also be some economic effects on the market for
investment advice. For example, any improved compliance may not only
reduce agency costs in current investment advisory relationships and
increase the value of those relationships to current clients, it may
also increase trust in the market for investment advice among all
investors, which may result in more investors seeking advice from
investment advisers. This may, in turn, benefit investors by improving
the efficiency of their portfolio allocation. To the extent it is
costly or difficult, at least in the short term, to expand the supply
of investment advisory services to meet an increase in demand, any such
new demand for investment adviser services could potentially put some
upward price pressure on fees. At the same time, however, if any such
new demand increases the overall profitability of investment advisory
services, then we expect it would encourage entry by new investment
advisers--or hiring of new representatives, by current investment
advisers--such that competition would increase over time. Indeed, we
recognize that the recent growth in the investment adviser segment of
the market, both in terms of firms and number of representatives,\58\
may suggest that the costs of expanding the supply of investment
advisory services are currently relatively low.
---------------------------------------------------------------------------

    \58\ See Form CRS Proposal, supra note 6, at Section IV.A.1.d.
---------------------------------------------------------------------------

    Additionally, we acknowledge that to the extent certain investment
advisers recognize, due to the Commission's interpretation, that their
obligations to clients are stricter than how they currently interpret
their fiduciary duty, it could potentially affect competition.
Specifically, the Commission's interpretation of certain aspects of the
standard of conduct for investment advisers may result in additional
compliance costs to meet their fiduciary obligation under the
Commission's interpretation. This increase in compliance costs, in
turn, may discourage competition for client segments that generate
lower revenues, such as clients with relatively low levels of financial
assets, which could reduce the supply of investment adviser services
and raise fees for these client segments. However, the investment
advisers who already are complying with the understanding of their
fiduciary duty reflected in the Commission's interpretation, and may
therefore currently have a comparative cost disadvantage, could
potentially find it more profitable to compete for the customers of
those investment advisers who would face higher compliance costs as a
result of the proposed interpretation, which would mitigate negative
effects on the supply of investment adviser services. Furthermore, as
noted above, there has been a recent growth trend in the supply of
investment advisory services, which is likely to mitigate any potential
negative supply effects from the Commission's interpretation.\59\
---------------------------------------------------------------------------

    \59\ Beyond having an effect on competition in the market for
investment adviser services, it is possible that the Commission's
interpretation could affect competition between investment advisers
and other providers of financial advice, such as broker-dealers,
banks, and insurance companies. This may be the case if certain
investors base their choice between an investment adviser and
another provider of financial advice, at least in part, on their
perception of the standards of conduct each owes to their customers.
To the extent that the Commission's interpretation increases
investors' trust in investment advisers' overall compliance with
their standard of conduct, certain of these investors may become
more willing, to hire an investment adviser rather than one of their
non-investment adviser competitors. As a result, investment advisers
as a group may increase their competitive situation compared to that
of other types of providers of financial advice. On the other hand,
if the Commission's interpretation raises costs for investment
advisers, they could become less competitive with other financial
services providers.
---------------------------------------------------------------------------

    Finally, to the extent the proposed interpretation would cause some
investment advisers to reassess their compliance with their disclosure
obligations, it could lead to a reduction in the expected profitability
of certain products associated with particularly conflicted advice for
which compliance costs would increase following the reassessment.\60\
As a result, the number of investment advisers willing to advise a
client to make these investments may be reduced. A decline in the
supply of investment adviser advice on these investments could
potentially reduce the efficiency of portfolio allocation of those
investors who might otherwise benefit from investment adviser advice on
these investments.
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    \60\ For example, such products could include highly complex,
high cost products with risk and return characteristics that are
hard to fully understand for retail investors or mutual funds or
fund share classes that may pay higher compensation to investment
advisers that are dual registrants, or that the investment adviser
and its representatives may receive through payments to an
affiliated broker-dealer or third party broker-dealer with which
representatives of the investment adviser are associated.
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IV. Request for Comment Regarding Areas of Enhanced Investment Adviser
Regulation

    In 2011, the Commission issued the staff's 913 Study, pursuant to
section 913 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, in which the staff recognized several areas for
potential harmonization of broker-dealer and investment adviser
regulation.\61\ We have identified a few discrete areas where the
current broker-dealer framework provides investor protections that may
not have counterparts in the investment adviser context, and request
comment on those areas. The Commission intends to consider these
comments in connection with any future proposed rules or other proposed
regulatory actions with respect to these matters.
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    \61\ The staff made two primary recommendations in the 913
Study. The first recommendation was that we engage in rulemaking to
implement a uniform fiduciary standard of conduct for broker-dealers
and investment advisers when providing personalized investment
advice about securities to retail customers. The second
recommendation was that we consider harmonizing certain regulatory
requirements of broker-dealers and investment advisers where such
harmonization appears likely to enhance meaningful investor
protection, taking into account the best elements of each regime. In
the 913 Study, the areas the staff suggested the Commission consider
for harmonization included, among others, licensing and continuing
education requirements for persons associated with firms. The staff
stated that the areas identified were not intended to be a
comprehensive or exclusive listing of potential areas of
harmonization. See 913 Study supra note 38.
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A. Federal Licensing and Continuing Education

    Associated persons of broker-dealers that effect securities
transactions are required to be registered with the Financial Industry
Regulatory Authority (``FINRA''),\62\ and must meet

qualification requirements, which include passing a securities
qualification exam and fulfilling continuing education
requirements.\63\ The federal securities laws do not require investment
adviser representatives to become licensed or to meet qualification
requirements, but most states impose registration, licensing, or
qualification requirements on investment adviser representatives who
have a place of business in the state, regardless of whether the
investment adviser is registered with the Commission or the state.\64\
These qualification requirements typically mandate that investment
adviser representatives register and pass certain securities exams or
hold certain designations (such as Chartered Financial Analyst
credential).\65\ The staff recommended in the 913 Study that the
Commission consider requiring investment adviser representatives to be
subject to federal continuing education and licensing requirements.\66\
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    \62\ Generally, all registered broker-dealers that deal with the
public must become members of FINRA, a registered national
securities association, and may choose to become exchange members.
See Exchange Act section 15(b)(8) and Exchange Act rule 15b9-1.
FINRA is the sole national securities association registered with
the SEC under section 15A of the Exchange Act.
    \63\ See NASD Rule 1021 (``Registration Requirements''); NASD
Rule 1031 (``Registration Requirements''); NASD Rule 1041
(``Registration Requirements for Assistant Representatives''); FINRA
Rule 1250 (``Continuing Education Requirements'').
    \64\ See 913 Study, supra note 38, at 86. See also Advisers Act
rule 203A-3(a) (definition of ``investment adviser
representative'').
    \65\ See 913 Study, supra note 38, at 86-87, 138. The North
American Securities Administrators Association (``NASAA'') is
considering a potential model rule that would require that
investment adviser representatives meet a continuing education
requirement in order to maintain their state registrations. An
internal survey of NASAA's membership identified strong support for
such a requirement along with significant regulatory need. NASAA is
now conducting a nationwide survey of relevant stakeholders to get
their input and views on such a requirement. For more information,
see http://www.nasaa.org/industry-resources/investment-advisers/nasaa-survey-regarding-continuing-education-for-investment-adviser-representatives/.
    \66\ Several commenters, cited in the 913 Study, suggested that
this was a gap that should be addressed. See 913 Study, supra note
38, at 138 (citing letters from AALU, Bank of America, FSI,
Hartford, LPL, UBS, and Woodbury).
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    We request comment on whether there should be federal licensing and
continuing education requirements for personnel of SEC-registered
investment advisers. Such requirements could be designed to address
minimum and ongoing competency requirements for the personnel of SEC-
registered advisers.\67\
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    \67\ See 913 Study, supra note 38, at 138.
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     Should investment adviser representatives be subject to
federal continuing education and licensing requirements?
     Which advisory personnel should be included in these
requirements? For example, should persons whose functions are solely
clerical or ministerial be excluded, similar to the exclusion in the
FINRA rules regarding broker-dealer registered representatives? Should
a subset of registered investment adviser personnel (such as supervised
persons, individuals for whom an adviser must deliver a Form ADV
brochure supplement, ``investment adviser representatives'' as defined
in the Advisers Act, or some other group) be required to comply with
such requirements?
     How should the continuing education requirement be
structured? How frequent should the certification be? How many hours of
education should be required? Who should determine what qualifies as an
authorized continuing education class?
     How could unnecessary duplication of any existing
continuing education requirement be avoided?
     Should these individuals be required to register with the
Commission? What information should these individuals be required to
disclose on any registration form? Should the registration requirements
mirror the requirements of existing Form U4 or require additional
information? Should such registration requirements apply to individuals
who provide advice on behalf of SEC-registered investment advisers but
fall outside the definition of ``investment adviser representative'' in
rule 203A-3 (because, for example, they have five or fewer clients who
are natural persons, they provide impersonal investment advice, or ten
percent or less of their clients are individuals other than qualified
clients)? Should these individuals be required to pass examinations,
such as the Series 65 exam required by most states, or to hold certain
designations, as part of any registration requirements? Should other
steps be required as well, such as a background check or
fingerprinting? Would a competency or other examination be a
meritorious basis upon which to determine competency and proficiency?
Would a competency or other examination requirement provide a false
sense of security to advisory clients of competency or proficiency?
     If continuing education requirements are a part of any
licensing requirements, should specific topics or types of training be
required? For example, these individuals could be required to complete
a certain amount of training dedicated to ethics, regulatory
requirements or the firm's compliance program.
     What would the expected benefits of continuing education
and licensing be? Would it be an effective way to increase the quality
of advice provided to investors? Would it provide better visibility
into the qualifications and education of personnel of SEC-registered
investment advisers?
     What would the expected costs of continuing education and
licensing be? How expensive would it be to obtain the continuing
education or procure the license? Do those costs scale, or would they
fall more heavily on smaller advisers? Would these requirements result
in a barrier to entry that could decrease the number of advisers and
advisory personnel (and thus potentially increase the cost of advice)?
     What would the effects be of continuing education and
licensing for investment adviser personnel in the market for investment
advice (i.e., as compared to broker-dealers)?
     What other types of qualification requirements should be
considered, such as minimum experience requirements or standards
regarding an individual's fitness for serving as an investment adviser
representative?

B. Provision of Account Statements

    Fees and costs are important to retail investors,\68\ but many
retail investors are uncertain about the fees they will pay.\69\ The
relationship summary that we are proposing in a concurrent release
would discuss certain differences between advisory and brokerage fees
to provide investors more clarity concerning the key categories of fees
and expenses they should expect to pay, but would not require more
complete, specific or personalized disclosures or disclosures about the
amount of fees and expenses.\70\ We believe that delivery of periodic
account statements, if they specified the dollar amounts of

fees and expenses, would allow clients to readily see and understand
the fees and expenses they pay for an adviser's services. Clients would
receive account statements close in time to the assessment of periodic
account fees, which could be an effective way for clients to understand
and evaluate the cost of the services they are receiving from their
advisers.
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    \68\ See Staff of the Securities and Exchange Commission, Study
Regarding Financial Literacy Among Investors as required by Section
917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Aug. 2012), at iv, available at https://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf (``With respect to
financial intermediaries, investors consider information about fees,
disciplinary history, investment strategy, conflicts of interest to
be absolutely essential.'').
    \69\ See Angela A. Hung, et al., RAND Institute for Civil
Justice, Investor and Industry Perspectives on Investment Advisers
and Broker-Dealers (2008), at xix, available at https://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf (``In fact, focus-group
participants with investments acknowledged uncertainty about the
fees they pay for their investments, and survey responses also
indicate confusion about the fees.'').
    \70\ See Form CRS Proposal, supra note 6, at Section II.B.4.
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    Broker-dealers are required to provide confirmations of
transactions with detailed information concerning commissions and
certain other remuneration, as well as account statements containing a
description of any securities positions, money balances or account
activity during the period since the last statement was sent to the
customer.\71\ Broker-dealers generally must provide account statements
no less than once every calendar quarter. Brokerage customers must
receive periodic account statements even when not receiving immediate
trade confirmations.\72\ Although we understand that many advisers do
provide clients with account statements, advisers are not directly
required to provide account statements under the federal securities
laws. Notably, however, the custody rule requires advisers with custody
of a client's assets to have a reasonable basis for believing that the
qualified custodian sends an account statement at least quarterly.\73\
In addition, in any separately managed account program relying on rule
3a-4 under the Investment Company Act of 1940, the program sponsor or
another person designated by the sponsor must provide clients
statements at least quarterly containing specified information.\74\
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    \71\ See, e.g., NASD Rule 2340; FINRA Rule 2232; MSRB Rule G-15.
See also Exchange Act rule 15c3-2 (account statements); Exchange Act
rule 10b-10 (confirmation of transactions).
    \72\ See Confirmation of Transactions, Securities Exchange Act
Release No. 34962 (November 10, 1994).
    \73\ Advisers Act rule 206(4)-2(a)(3) (custody rule). The
Commission also has stated that an adviser's policies and
procedures, at a minimum, should address the accuracy of disclosures
made to investors, clients, and regulators, including account
statements.
    \74\ Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.]
(``Investment Company Act'') rule 3a-4(a)(4).
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    We request comment on whether we should propose rules to require
registered investment advisers to provide account statements, either
directly or via the client's custodian, regardless of whether the
adviser is deemed to have custody of client assets under Advisers Act
Rule 206(4)-2 or the adviser is a sponsor (or a designee of a sponsor)
of a managed account program relying on the safe harbor in Investment
Company Act rule 3a-4.
     To what extent do retail clients of registered investment
advisers already receive account statements? To what extent do those
account statements specify the dollar amounts charged for advisory fees
and other fees (e.g., brokerage fees) and expenses? Would retail
clients benefit from a requirement that they receive account statements
from registered investment advisers? If clients are uncertain about
what fees and expenses they will pay, would they benefit from a
requirement that, before receiving advice from a registered investment
adviser, they enter into a written (including electronic) agreement
specifying the fees and expenses to be paid?
     What information, in addition to fees and expenses, would
be most useful for retail clients to receive in account statements?
Should any requirement to provide account statements have prescriptive
requirements as to presentation, content, and delivery? Should they
resemble the account statements required to be provided by broker-
dealers, under NASD Rule 2340 with the addition of fee disclosure?
     How often should clients receive account statements?
     How costly would it be to provide account statements? Does
that cost depend on how those account statements could be delivered
(e.g., via U.S. mail, electronic delivery, notice and access)? Are
there any other factors that would impact cost?

C. Financial Responsibility

    Broker-dealers are subject to a comprehensive financial
responsibility program. Pursuant to Exchange Act rule 15c3-1 (the net
capital rule), broker-dealers are required to maintain minimum levels
of net capital designed to ensure that a broker-dealer under financial
stress has sufficient liquid assets to satisfy all non-subordinated
liabilities without the need for a formal liquidation proceeding.\75\
Exchange Act rule 15c3-3 (the customer protection rule) requires
broker-dealers to segregate customer assets and maintain them in a
manner designed to ensure that should the broker-dealer fail, those
assets are readily available to be returned to customers.\76\ Broker-
dealers are also subject to extensive recordkeeping and reporting
requirements, including an annual audit requirement as well as a
requirement to make their audited balance sheets available to
customers.\77\ Broker-dealers are required to be members of the
Securities Investor Protection Corporation (``SIPC''), which is
responsible for overseeing the liquidation of member broker-dealers
that close due to bankruptcy or financial trouble and customer assets
are missing. When a brokerage firm is closed and customer assets are
missing, SIPC, within certain limits, works to return customers' cash,
stock, and other securities held by the firm. If a firm closes, SIPC
protects the securities and cash in a customer's brokerage account up
to $500,000, including up to $250,000 protection for cash in the
account.\78\ Finally, FINRA rules require that broker-dealers obtain
fidelity bond coverage from an insurance company.\79\
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    \75\ See Exchange Act rule 15c3-1.
    \76\ See Exchange Act rule 15c3-3.
    \77\ See Exchange Act rules 17a-3, 17a-4, and 17a-5.
    \78\ See Securities Investor Protection Act of 1970, Public Law
91-598, 84 Stat. 1636 (Dec. 30, 1970), 15 U.S.C. 78aaa through 15
U.S.C. 78lll.
    \79\ See FINRA Rule 4360, (``Fidelity Bonds'').
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    Under Advisers Act rule 206(4)-2, investment advisers with custody
must generally maintain client assets with a ``qualified custodian,''
which includes banks and registered broker-dealers, and must comply
with certain other requirements.\80\ In 2009 the Commission adopted
amendments to the custody requirements for investment advisers that,
among other enhancements, required all registered investment advisers
with custody of client assets to undergo an annual surprise examination
by an independent public accountant. SEC-registered investment
advisers, however, are not subject to any net capital requirements
comparable to those applicable to broker-dealers, although they must
disclose any material financial condition that impairs their ability to
provide services to their clients.\81\ Many investment advisers have
relatively small amounts of capital, particularly compared to the
amount of assets that they have under management.\82\ When we discover
a serious fraud by an adviser, often the assets of the adviser are
insufficient to compensate clients for their loss. In addition,
investment advisers are not required to obtain fidelity bonds, unlike

many other financial service providers that have access to client
assets.\83\
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    \80\ See Advisers Act rule 206(4)-2.
    \81\ See Form ADV. Many states have imposed fidelity bonding
and/or net capital requirements on state-registered investment
advisers. Rule 17g-1 under the Investment Company Act of 1940
requires registered investment companies to obtain fidelity bonds
covering their officers and employees who may have access to the
investment companies' assets.
    \82\ See Custody of Funds or Securities of Clients by Investment
Advisers, Investment Advisers Act Release No. 2968 (Dec. 30, 2009).
    \83\ Fidelity bonds are required to be obtained by broker-
dealers (FINRA Rule 4360; New York Stock Exchange Rule 319; American
Stock Exchange Rule 330); transfer agents (New York Stock Exchange
Rule Listed Company Manual Sec.  906); investment companies (17 CFR
270.17g-1); national banks (12 CFR 7.2013); federal savings
associations (12 CFR 563.190).
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    In light of these disparities, we request comment on whether SEC-
registered investment advisers should be subject to financial
responsibility requirements along the lines of those that apply to
broker-dealers.
     What is the frequency and severity of client losses due to
investment advisers' inability to satisfy a judgment or otherwise
compensate a client for losses due to the investment adviser's
wrongdoing?
     Should investment advisers be subject to net capital or
other financial responsibility requirements in order to ensure they can
meet their obligations, including compensation for clients if the
adviser becomes insolvent or advisory personnel misappropriate clients'
assets? \84\ Do the custody rule and other rules \85\ under the
Advisers Act adequately address the potential for misappropriation of
client assets and other financial responsibility concerns for advisers?
Should investment advisers be subject to an annual audit requirement?
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    \84\ We note that Congress and the Commission have considered
such requirements in the past. In 1973, a Commission advisory
committee recommended that Congress authorize the Commission to
adopt minimum financial responsibility requirements for investment
advisers, including minimum capital requirements. See Report of the
Advisory Committee on Investment Management Services for Individual
Investors, Small Account Investment Management Services, Fed. Sec.
L. Rep. (CCH) No. 465, Pt. III, 64-66 (Jan. 1973) (``Investment
Management Services Report''). Three years later, in 1976, the
Senate Committee on Banking, Housing and Urban Affairs considered a
bill that, among other things, would have authorized the Commission
to adopt rules requiring investment advisers (i) with discretionary
authority over client assets, or (ii) that advise registered
investment companies, to meet financial responsibility standards. S.
Rep. No. 94-910, 94th Cong. 2d Sess. (May 20, 1976) (reporting
favorably S. 2849). S. 2849 was never enacted. In 1992, both the
Senate and House of Representatives passed bills that would have
given the Commission the explicit authority to require investment
advisers with custody of client assets to obtain fidelity bonds. S.
226, 102d Cong., 2d Sess. (Aug. 12, 1992) and H.R. 5726, 102d Cong.
Ed (Sept. 23, 1992). Differences in these two bills were never
reconciled and thus neither became law. In 2003, the Commission
requested comment on whether to require a fidelity bonding
requirement for advisers as a way to increase private sector
oversight of the compliance by funds and advisers with the federal
securities laws. The Commission decided not to adopt a fidelity
bonding requirement at that time, but noted that it regarded such a
requirement as a viable option should the Commission wish to further
strengthen compliance programs of funds and advisers. Compliance
Programs of Investment Companies and Investment Advisers, Investment
Company Act Release No. 25925 (Feb. 5, 2003).
    \85\ See, e.g., Advisers Act rule 206(4)-7 (requires each
investment adviser registered or required to be registered with the
Commission to adopt and implement written policies and procedures
reasonably designed to prevent violations of the Advisers Act and
Advisers Act rules, review those policies and procedures annually,
and designate an individual to serve as a chief compliance officer).
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     Should advisers be required to obtain a fidelity bond from
an insurance company? If so, should some advisers be excluded from this
requirement? \86\ Is there information or data that demonstrates
fidelity bonding requirements provide defrauded clients with recovery,
and if so what amount or level of recovery is evidenced?
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    \86\ As noted above, the 1992 legislation would have given us
the explicit authority to require bonding of advisers that have
custody of client assets or that have discretionary authority over
client assets. Section 412 of ERISA [29 U.S.C. 1112] and related
regulations (29 CFR 2550.412-1 and 29 CFR 2580) generally require
that every fiduciary of an employee benefit plan and every person
who handles funds or other property of such a plan shall be bonded.
Registered investment advisers exercising investment discretion over
assets of plans covered by title I of ERISA are subject to this
requirement; it does not apply to advisers who exercise discretion
with respect to assets in an individual retirement account or other
non-ERISA retirement account. In 1992, only approximately three
percent of Commission registered advisers had discretionary
authority over client assets; as of March 31, 2018, according to
data collected on Form ADV, 91 percent of Commission registered
advisers have that authority.
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     Alternatively, should advisers be required to maintain a
certain amount of capital that could be the source of compensation for
clients? \87\ What amount of capital would be adequate? \88\
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    \87\ See supra note 84.
    \88\ Section 412 of ERISA provides that the bond required under
that section must +be at least ten percent of the amount of funds
handled, with a maximum required amount of $500,000 (increased to
$1,000,000,000 for plans that hold securities issued by an employer
of employees covered by the plan).
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     What would be the expected cost of either maintaining some
form of reserve capital or purchasing a fidelity bond? Specifically, in
addition to setting aside the initial sum or purchasing the initial
bond, what would be the ongoing cost and the opportunity cost for
investment advisers? Would one method or the other be more feasible for
certain types of investment advisers (particularly, smaller advisers)?
     Would the North American Securities Administrators
Association Minimum Financial Requirements For Investment Advisers
Model Rule 202(d)-1 \89\ (which requires, among other things, an
investment adviser who has custody of client funds or securities to
maintain at all times a minimum net worth of $35,000 (with some
exceptions), an adviser who has discretionary authority but not custody
over client funds or securities to maintain at all times a minimum net
worth of $10,000, and an adviser who accepts prepayment of more than
$500 per client and six or more months in advance to maintain at all
times a positive net worth), provide an appropriate model for a minimum
capital requirement? Why or why not?
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    \89\ NASAA Minimum Financial Requirements For Investment
Advisers Model Rule 202(d)-1 (Sept. 11, 2011), available at http://www.nasaa.org/wp-content/uploads/2011/07/IA-Model-Rule-Minimum-Financial-Requirements.pdf.
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     Although investment advisers are required to report
specific information about the assets that they manage on behalf of
clients, they are not required to report specific information about
their own assets.\90\ Should advisers be required to obtain annual
audits of their own financials and to provide such information on Form
ADV? Would such a requirement raise privacy concerns for privately held
advisers?
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    \90\ Form ADV only requires that advisers with significant
assets (at least $1 billion) report the approximate amount of their
assets within one of the three ranges ($1 billion to less than $10
billion, $10 billion to less than $50 billion, and $50 billion or
more). Item 1.O of Part 1A of Form ADV.

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    By the Commission.

    Dated: April 18, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-08679 Filed 5-8-18; 8:45 am]
 BILLING CODE 8011-01-P