professionals.\676\ Therefore, the potential gains associated with a
reduction in mismatch risk due to the prohibition on certain names and
titles may be limited because some confused investors seeking an advice
relationship from investment advisers could continue to inadvertently
hire these other types of financial intermediaries that also use
``adviser'' or advisor'' in their names and titles.
---------------------------------------------------------------------------

    \676\ See supra note 400.
---------------------------------------------------------------------------

    Another potential limitation of the proposed restriction on the use
of certain titles is that a dual registrant could still call itself an
``adviser'' or ``advisor,'' but then only offer brokerage services to
investors that may not be legally and financially sophisticated enough
to understand the differences in types of relationships and standards
of conduct available.\677\ Finally, for retail investors that rely on
professional or personal recommendations in their search for financial
professionals, the proposed prohibition on the use of certain titles is
likely to have a limited effect on both search costs and the risk of
mismatch in the advice relationship.
---------------------------------------------------------------------------

    \677\ As discussed above, however, financial professionals who
are not themselves investment advisers or supervised persons of
investment advisers and who provide advice on behalf of such
advisers would also not be able to use the terms ``adviser'' or
``advisor'' in their professional titles.
---------------------------------------------------------------------------

ii. Costs of the Restriction on the Use of Certain Titles
    Although the Commission preliminarily believes that the proposed
rule would decrease investor confusion, search costs, and mismatch for
some segment of the investor pool that search for professionals based
on names or titles, investor confusion and search costs could increase
for those that would have, in the absence of the rule, selected broker-
dealers and associated natural persons that would have to change their
company names or titles as a result of the proposed rule.\678\ For
example, prospective customers familiar with a firm's name or financial
professional's title may be especially confused by a change of either
name or title to the extent that the term ``adviser'' or ``advisor'' is
part of the firm's name brand or the titles of the professionals. Any
increase in confusion as a result of the rule along these lines would
likely be larger if the changed names or titles of broker-dealer firms
that currently contain the words ``adviser'' or ``advisor'' are widely
recognized as brands by investors.\679\ Further, even if the broker-
dealer name or title is unlikely to change, some investors may remove
certain firms from their search list as professional names or titles
change as a result of the rule. If, for example, a prospective investor
is using the search term ``financial advisor'' to search for firms and
financial professionals located in their city, some firms and financial
professionals will be removed from any possible searches by these
investors as a result of the proposed rule, even though these financial
professionals might have been the best match to the preferences and
expectations of the investor. However, these kind of potential costs to
some current investors are likely to be limited to the extent that
proposed rule is limited to firm name or title and individual job name
or title and would not require firms and financial professionals to
remove the restricted terms from other content, if they are not using
such terms as a name or a title.
---------------------------------------------------------------------------

    \678\ As discussed in the baseline, several studies indicate
that many investors receive personal or professional referrals in
the selection of their broker-dealer or investment advisor. However,
even these investors may investigate these referrals prior to
undertaking outreach, and therefore, may avoid certain financial
professionals as a result of the name or title change.
    \679\ As discussed in the baseline, approximately 87 broker-
dealers that are not dually registered as investment advisers and do
not report non-securities business use the words ``adviser,''
``advisor,'' or ``advisory'' as part of their current company name.
These firms would likely have to change their company name as a
result of this proposed rule. However, any loss in brand value due
to this change could be mitigated to the extent the prohibited terms
are not an important part of the firm's brand.
---------------------------------------------------------------------------

    The proposed rule may also increase investor confusion to the
extent some firms and financial professionals invent new names or
titles to substitute for the restricted ones. Studies already indicate
that the wide variety of names and titles used by firms and financial
professionals causes general investor confusion about the market for
investment advice. The magnitude of such costs is hard to predict, but
would likely increase search costs for less knowledgeable retail
investors that use names or titles to search for financial
professionals or firms, and may also increase the likelihood of a
mismatch for some of these investors between the type of advice
relationship they prefer and the type of firm and financial
professional they hire.
    Investors seeking advice from broker-dealers may also face
potential harm if some broker-dealers change their business model as a
result of the proposed rule. As discussed above, we believe that most
broker-dealers that would be subject to the restrictions of the
proposed rule have chosen names and titles to build their customer
base. Given that the market for investment advice overall appears to be
relatively competitive, with respect to the number of firms and
financial professionals, firms and financial professionals likely have
chosen names or titles that they view as effective in marketing their
services to investors. Therefore, being forced to switch names or
titles could reduce the potential customer flow for some broker-dealers
(and registered representatives of dual registrants who are not
supervised persons of an investment adviser or who are supervised
persons but do not provide investment advice on behalf of such
investment adviser) who currently are using name or titles which
include the term ``adviser'' and ``advisor'' and who serve retail
investors. In lieu of adopting a new name or title without ``adviser''
or ``advisor,'' these firms or financial professionals might respond by
exiting the retail investor market, or may bypass the compliance and
other costs associated with this proposed rule by also registering as
investment advisers or becoming supervised persons of an investment
adviser who provide investment advice on behalf of such investment
adviser, which would change their incentives to market their brokerage
services to investors.\680\ Either of these changes to business
practices could reduce the availability of broker-dealer services for
investors.\681\ To the

extent the costs of exiting the retail investor market or associated
initial and ongoing costs of becoming a registered investment adviser
(or a supervised person of an investment adviser who provides
investment advice on behalf of such investment adviser) are greater
than the costs associated with complying with the proposed rule, the
likelihood of exit from the retail market or a change to the existing
business model from a brokerage to advisory model would be low. In this
case, the anticipated effect on investors from the loss of existing
broker-dealer advice is expected to be limited. However, if it is
costlier to change names or titles than to switch business model for
broker-dealers, we expect some investors may experience a reduction in
supply of broker-dealer advice services. Finally, because the
Commission recognizes that a standalone broker-dealer can provide
advice to retail investors without being regulated as an investment
adviser provided that such advice is merely ``solely incidental to''
its brokerage business and the broker-dealer receives no ``special
compensation'' for the advice, the proposed restriction would not
prevent standalone broker-dealers from conveying the services that they
provide in other content, without using the titles or names ``adviser''
or ``advisor.'' This may also limit the likelihood of exit from the
retail market or a change to the existing business model from a
brokerage to an advisory model.
---------------------------------------------------------------------------

    \680\ Some firms could potentially increase their profits by
moving some customers from a brokerage account to an advisory
account (e.g., customers who rarely trade). Such firms would have
incentives to cut back on marketing of existing brokerage services
to such customers and instead market the new advisory services.
    \681\ For example, in the event of exit by a broker-dealer,
investors who want broker-dealer services would be forced to
undertake search costs to find another firm and financial
professional to meet their perceived needs, but also bear an
increased cost associated with mismatch if they choose the wrong
type of firm and financial professional. In the event of a switch
from a brokerage model to an advisory model, investors may be forced
to bear the costs associated with an advisory account that could
exceed costs associated with services provided by a broker-dealer,
or face costs associated with search and mismatch if they choose to
change financial intermediaries, as discussed above.
---------------------------------------------------------------------------

    The proposed rule could, however, also increase the risk of
mismatch for some investors by removing standalone registered broker-
dealers and registered representatives of dual registrants who are not
supervised persons of an investment adviser from the pool of financial
intermediaries that use the terms ``adviser'' or ``advisor'' in names
and titles, while not affecting the use of these terms by other types
of financial intermediaries, including banks, trust companies,
insurance companies, and commodities professionals. Investors who are
seeking financial services from either investment advisers or broker-
dealers could instead inadvertently hire other types of financial
intermediaries that would continue use these terms ``adviser'' or
``advisor,'' thereby potentially exacerbating the degree of mismatch
between the type of relationship that they seek and what they receive.
Further, neither this rule nor the proposed relationship summary would
address the potential mismatch because these entities and natural
persons are outside of the scope of the Commission rules. The
Commission is not able to estimate the scope of this continuing
potential for mismatch because we do not have access to information on
the extent to which retail investors include these other types of
financial intermediaries (deliberately or inadvertently) in their
search for financial advice, nor the extent to which they see the
services provided by these other financial intermediaries as substitute
for the services provided by investment advisers or broker-dealers.
    Another potential cost for investors is that affected broker-
dealers may attempt to directly pass through any costs they would incur
due to the proposed restriction on certain names and titles. A broker-
dealer's incentives for such pass-through behavior would be attenuated
the more competitive the broker-dealer's local market is in the sense
that price sensitivity of demand is high.
    Finally, we note that many of the costs and benefits to investors
that we discussed above depend on the extent that titles and names
affect investors' selection of their financial professional. The
evidence discussed in Section IV.A.3.a suggests that between 40% and
50% of investors find their financial professionals through personal
recommendations.\682\ For this set of investors, the proposed rule
would likely have little impact on search costs or potential for
mismatch between their preferences and expectations and the type of
advisory service for which they contract. We also note that we are not
able to provide quantitative estimates of potential changes in search
costs. Search costs for investors as well as costs due to mismatch
would depend on a large set of individual specific factors, such as
exactly what procedures investors use to search for financial
professionals, what restrictions they put on their search (for example,
choice of market, how many firms or professionals they are willing to
sample before making a decision), the method they use to evaluate
different alternative financial professionals they have identified,
etc. The costs will to a large part not be monetary in nature but
rather in the form of time and effort spent. The monetized value of
that time and effort will also be individual specific. We do not have
access to data that would provide us with this type of information,
which we would need to estimate search costs. Similarly, we also are
unable to provide estimates of changes in costs due to changes in the
potential for mismatch as we do not currently have data on the
percentage of the investor population that is mismatched, or the extent
of harm that comes from mismatch.\683\ For example, we don't have an
analysis of how well someone would have done in their portfolio
(especially after costs) if they had been correctly matched.
---------------------------------------------------------------------------

    \682\ RAND Study, supra note 5 and 917 Financial Literacy Study,
supra note 20.
    \683\ To estimate the potential harm from mismatch we would need
to analyze how well someone could have done in their portfolio
(after costs) if they had been correctly matched. This requires a
rich set of investor characteristics as well as information about
the investment menus and fee structures of potential alternative
firms and financial professionals investors could have hired. We do
not currently have access to such detailed information.
---------------------------------------------------------------------------

iii. Benefits and Costs of the Required Disclosures About Regulatory
Status of a Financial Services Provider
    We anticipate the proposed requirements for broker-dealers and
investment advisers and their associated natural persons and supervised
persons to prominently disclose their registration (or firm association
for financial professionals) status in retail investor communications
would reduce investor confusion as well as search costs associated with
locating and hiring a firm, which could reduce the probability of
mismatch for investors seeking advice. In particular, for investors who
understand the meaning of the registration status and know they want to
hire either a registered broker-dealer or a SEC-registered investment
adviser, we expect the search for the correct type of firm will be made
both clearer and less time consuming, as these investors will more
readily observe the registration status. Search costs for investors for
whom the registration status has little meaning, however, are not
expected to experience a decrease in either confusion or search costs
due to these disclosure requirements. Disclosure may also reduce the
possibility of mismatch of hiring the wrong type of firm for investors
who understand the meaning of the registration status and know what
type of financial intermediary they want to hire, although we note that
the likelihood for such mismatch is likely lower in the first place for
such investors compared to less knowledgeable investors. For the pool
of investors that are confused by both the type of advice relationship
that they

prefer, including how they want to pay for it, as well as
professionals' titles, disclosure of registration status alone may not
be sufficient to alleviate confusion in the type of advisory services
provided by or the standard of conduct applicable to firms or financial
professionals. Finally, for retail investors that rely on professional
or personal recommendations in their search for financial
professionals, the disclosure requirement is likely to have a limited
effect on both search costs and the risk of mismatch in the advice
relationship. As discussed above, we do not have access to information
that would allow us to provide quantitative estimates of the potential
costs and benefits to the investor from these proposed disclosure
requirements.
    In general, we do not anticipate any costs to investors from the
proposed rules to disclose registration status. However, it could be
that firms may attempt to pass through any compliance costs to
investors through higher fees, in particular those that operate in
markets where the price sensitivity of demand may be lower. Given that
compliance costs would be of a one-time nature, as discussed above, we
believe the likelihood and magnitude of such pass-through would be low.
b. Standalone Registered Broker-Dealers
    The proposed rule would restrict broker-dealers who are not dually
registered as investment advisers and their associated natural persons
who are not themselves investment advisers or supervised persons of
investment advisers that provide advice on behalf of such advisers from
using the terms ``adviser'' or ``advisor'' when communicating with
retail investors. As described previously in Section IV.A.1,
approximately 87% of retail facing broker-dealer firms and 50% of
registered representatives are not dually registered as investment
advisers, and therefore potentially could be affected by the proposed
restriction. The fraction of standalone broker-dealer firms that are
currently using the terms ``adviser'' or ``advisor'' in their firm
names or titles and do not report a non-securities business, is only
approximately 3.5%.\684\ When it comes to names or titles by registered
representatives at standalone broker-dealers, the RAND Study evidence
discussed in Section IV.A.1.f suggests that around 31% of professionals
providing only brokerage services used titles containing the terms
``adviser'' or ``advisor.'' If the evidence presented in the baseline,
is representative of the overall universe of standalone registered
broker-dealers, the fraction of firms and associated natural persons
that would be affected by the proposed prohibition may be relatively
low.\685\
---------------------------------------------------------------------------

    \684\ As discussed in supra Section IV.A.1.f, there are 87 (103-
16 = 87) retail facing standalone broker-dealers without non-
securities business that are currently using one of these terms in
their firm names, which represents approximately 3.5% of the 2,497
retail acing standalone broker-dealers (2,857-360 = 2,497; see supra
Table 1, Panel B). If we go beyond firm names and instead look at
how firms' publicly describe themselves on their websites, the
evidence presented in Section IV.A.1.f suggests that of the sampled
standalone broker-dealers, less than 10% describe themselves using
the terms ``adviser'' or ``advisor.'' Although some of these website
descriptions may still be allowed under the proposed rule, it
suggests that the fraction of standalone broker-dealers that rely on
these terms to describe themselves may be relatively low.
    \685\ We estimate that approximately 226,132 (942,215 x 0.24 =
226,132; see supra Table 6) registered representatives of broker-
dealers are not also registered as investment advisory
representatives. Among these registered representatives,
approximately 119,729 are employed by dually registered firms
(494,399 x 0.61 x 0.397 = 119,729; see supra Section IV.A.1.e),
which means 106,403 are employed by standalone broker-dealers.
Further, if only 31% of broker-dealer registered representatives
that are not dual-hatted (see supra Table 8) use titles containing
the terms ``adviser'' or ``advisor,'' then we estimate that the
total number of non-dual hatted registered representatives that
would be potentially subject to this proposed prohibition would be
70,101, which is approximately 15.5% of all registered
representatives. Of these representatives, 32,985 (0.31 x 106,403 =
32,985) are employed by standalone broker-dealers and approximately
37,116 (0.31 x 119,729 = 37,116) are employed by dual registrants.
Note, the number of non-dual hatted registered representatives at
dual registrants that would be potentially affected by the rule is
likely lower than the estimated 37,166 because some of these
representatives may be supervised persons providing advisory service
without being dual-hatted. We are not able to estimate how large the
fraction of such registered representatives would be. On the other
hand, we do not have information about how many dual-hatted
registered representatives among dual registrants that they are not
supervised persons providing advisory services despite being dual-
hatted, and therefore would also be subject to the proposed
restriction on the use of certain titles.
---------------------------------------------------------------------------

    If the proposed restriction on certain names or titles would reduce
potential investor confusion and prevent retail investors from
potentially being misled, it could have some positive benefits for the
subset of broker-dealers that would be impacted by this restriction but
are not marketing advice services to attract business. In particular,
these broker-dealers may be able to better attract customer flow and
more efficiently target their marketing and advertising campaigns to
reduce the likelihood of ``false starts'' associated with the potential
mismatch with retail investors. Moreover, broker-dealers that are not
dually registered may similarly benefit from the requirement to
prominently display registration status as that may also help reduce
investor confusion. Firms and financial professionals may also realize
a limited benefit from this disclosure such that they can more
effectively signal their type in communications, even when the firm or
professional names or titles are not perfectly aligned with the
registration status.\686\
---------------------------------------------------------------------------

    \686\ Note that any such benefits from the proposed rules relies
on an assumption that some broker-dealers are not currently
optimizing to receive such benefits by voluntarily changing names
and titles or prominently display their registration status.
However, as noted above, we expect in an efficient market, firms
have already chosen names and titles that they view as effective
marketing tools. As a result, we expect this benefit will be limited
to the extent firms are currently rationally optimizing their choice
of names and titles.
---------------------------------------------------------------------------

    For the segment of broker-dealers that would be affected by a
restriction of using the terms ``adviser'' or ``advisor,'' we
anticipate potentially substantial, one-time costs associated with the
proposed rule. Broker-dealer firms subject to the restrictions on the
use of certain names or titles would be required to change current
company names or titles (if the company name or title contains
``adviser/advisor''), and marketing materials, advertisements (e.g.,
print ads or television commercials), website and social media
appearances that use the current company name or title, among other
items, resulting in direct compliance costs. Similarly, all personal
communications tools used by financial professionals, such as business
cards, letterhead, social media profiles, and signature blocks would
need to be amended to reflect new company and financial professionals'
names or titles. The proposed requirement to prominently disclose
registration status in print or electronic retail investor
communications is also expected to require changes to the same set of
materials and communication tools, and therefore, also would have to be
modified to incorporate the registration status in the manner the rule
prescribes.\687\
---------------------------------------------------------------------------

    \687\ See infra Section V.G for estimates of some of these
compliance costs developed for the purpose of the Paperwork
Reduction Act.
---------------------------------------------------------------------------

    To the extent that the costs discussed above have a fixed-cost
component (i.e., a print ad would likely cost the same regardless of
the size of the firm), the costs associated with producing new
communication and advertising materials would be disproportionately
higher for smaller broker-dealer firms. Other costs, however, may
increase with the size of the broker-dealer, such as costs associated
with revisions to each individual representative's communication and
advertising materials, and therefore would increase with a broker-
dealer's size.

    In addition to direct compliance costs associated with producing
new materials, broker-dealers would likely bear costs associated with
contacting current and prospective customers, whether by email, mass
mailings, one-on-one meetings, or telephone conversations, to inform
them of changes to names and titles. Such outreach on behalf of the
broker-dealer or the individual representatives would inform existing
and prospective investors of a name or title change, and whether or not
any services have changed and may be necessary in order to minimize any
confusion among current and prospective customers that could
potentially lead to a loss of business during a ``changeover''
period.\688\ This kind of outreach, however, could be costly to
financial professionals and firms if it diverted time and resources
away from the core business of the broker-dealer.\689\ Further, the
greater the name recognition of a current company or the larger the
size of the company, the costlier such an outreach is likely to be as
more current and prospective customers would need to be informed of the
name change. Finally, to the extent that a broker-dealer's company name
is recognized as a brand in the market and therefore represents a
valuable intangible asset to the firm, some of its ``brand value'' may
be lost following a company name change.\690\ We note that the number
of broker-dealer firms whose brand value may be negatively affected by
the rule is relatively limited, as only around 3.5% of the broker-
dealer firms that would be subject to the rule are using any of the
prohibited terms in their company names.\691\
---------------------------------------------------------------------------

    \688\ In particular, without outreach, some broker-dealers could
experience a temporary reduction in the flow of prospective
customers that would have relied on the use of titles prohibited by
the proposed rule. In the absence of the prohibitions, these
investors would have ended up contracting with the broker-dealers,
but due to confusion over new company names and titles that would be
required to be used, these investors may avoid broker-dealers
subject to the change in names and titles, and these broker-dealers
could earn less revenue. Only after the potential customer base
becomes familiar with the new names and titles associated with a
given broker-dealer and its financial professionals, or the search
costs associated with these new titles decline, could these firms
potentially recover a portion of the prospective customer base that
was originally lost during the name transition period as a result of
the changeover confusion. The Commission does not have access to the
type of detailed customer information of individual broker-dealers
that would allow us to estimate the percentage of customers that
might be confused as a result of the name change or what fraction of
these customers might eventually be recovered by a broker-dealer.
    \689\ Although such outreach is not required by the proposed
rule, we anticipate that at least some percentage of affected
broker-dealers or financial professionals would undertake such
efforts in order to maintain good relationships with existing
customers.
    \690\ Academic evidence suggest corporate brands are valuable
intangible assets to firms; see, e.g., M. E. Barth, M. B. Clement,
G. Foster, & R. Kasznik, Brand values and capital market valuation,
Review of Accounting Studies, 3(1), 41-68 (1998).
    \691\ See supra note 648. Specifically, 3% refers to the total
number of broker-dealers that do not report non-securities business.
---------------------------------------------------------------------------

    Likewise, broker-dealers facing no constraints on their choice of
names and titles may choose the names and titles that they believe are
the most effective at helping attract customers, and may best describe
their business model, and reduce the effort associated with building a
customer base, as described above.\692\ Therefore, a segment of broker-
dealers that are currently using terms that would be restricted under
the proposed rule could experience a reduction in the efficiency of
their marketing efforts, which in turn might lead to fewer customers
and a loss of revenue compared to the baseline. In particular, those
broker-dealers that rely on advice services as an important part of
their value proposition to retail investors and directly compete with
investment advisers may lose competiveness, if names and titles become
less descriptive of this aspect of their business in the eyes of retail
investors. These marketing efficiency costs would be mitigated to the
extent the broker-dealers would use new names and titles that are
equally efficient at conveying they are providing advice, or to the
extent that the proposed restriction would not affect the use of terms
such as ``advisory services'' in other content, or using them in
metadata to attract internet search engines.\693\
---------------------------------------------------------------------------

    \692\ See discussion in Section IV.C.1.
    \693\ Note that to the extent affected broker-dealers would
choose other names and titles that convey a similar signal to
investors as those containing the terms ``adviser'' or ``advisor,''
it would reduce the efficiency of the proposed prohibition. In
Section IV.C.4.a we discuss an alternative that would prohibit a
broker-dealer from otherwise ``holding out'' as an investment
adviser, which would potentially also prevent the use of some
similar names and titles.
---------------------------------------------------------------------------

    Although we recognize that a significant fraction of a broker-
dealer's customer base is attributed to referrals, as noted in the 917
Financial Literacy Study, approximately 25% of survey respondents rely
on broker-dealer or financial professional names or titles in selecting
their current advisor.\694\ Depending on how effective the terms
``adviser'' or ``advisor'' are at attracting customers, costs
associated with the loss of certain titles or names could be
substantial for some broker-dealers.\695\
---------------------------------------------------------------------------

    \694\ See supra note 20.
    \695\ For example, if investors know that they are seeking
advice related to individual transactions (e.g., the type of mutual
fund or exchange-traded fund in which to invest), they may have a
preference for terms such as ``financial advisor'' compared to terms
such as ``financial planner'' or ``investment strategist,''
depending on their colloquial understanding of what an these terms
might imply for the level of service and standard of conduct. If
certain broker-dealers are restricted from using ``financial
advisor,'' these firms may lose these potential customers. Moreover,
these investors could potentially expend search costs as they sort
through investment advisers that use the term ``financial advisor''
until the investor is able to match with the right type of financial
professional.
---------------------------------------------------------------------------

    One way that affected broker-dealers could potentially mitigate the
costs associated with the potential loss of titles or names could be
for these firms to dually register as investment advisers. However,
dual registration imposes an additional layer of regulatory oversight
and compliance and need for training and licensing of employees to work
as investment adviser representatives, which would also be costly. A
broker-dealer would likely pursue such a strategy only if it expected
the costs of regulation as an investment adviser were lower than the
expected costs of modifying names and titles. We do not have access to
data that would allow us to estimate either the total costs for
modifying names and titles for broker-dealers, or the total costs of
becoming an investment adviser for these broker-dealers.
c. Investment Advisers (Including Dual Registrants)
    The proposed restriction on the use of the terms ``adviser'' and
``advisor'' in names and titles does not apply to registered investment
advisers, whether they are solely registered as investment advisers or
whether they are dually registered. Consequently, there would be no
compliance costs for registered investment advisers associated with the
restriction on the use of certain terms in names or titles. Some
benefits could accrue to investment advisers at the expense of impacted
broker-dealers. However, supervised persons of investment advisers who
are dually registered but do not provide investment advice on behalf of
such investment adviser would be prohibited from using the terms, which
could lead to costs for those financial professionals or their firms.
    Because the proposed restriction would force some standalone
registered broker-dealers to change their names and titles in a way
that may lead to less efficient marketing aimed at attracting potential
investors, as discussed above, some customer flow that might have gone
to these broker-dealers could be permanently diverted to investment
advisers who will not be required to

change their names.\696\ As a result, some investment advisers could
experience an increase in revenues due to an increase in customer flow.
The benefits may also be larger for investment advisers or dual
registrants that are able to continue to use names or titles that
include the term ``adviser'' or ``advisor'' as these terms could be the
draw that currently attracts customer flow to certain firms and
financial professionals, and that would be diverted due to a
restriction on the use of these terms by standalone registered broker-
dealers. In addition, assuming that small broker-dealers and investment
advisers select geographic areas where competition from larger firms is
low, then, as result of the proposed rule restricting the use of
certain names or titles by broker-dealers, small investment advisers
could especially benefit at the expense of small broker-dealers in
these locations.
---------------------------------------------------------------------------

    \696\ To the extent that investor confusion about the market for
financial services generally increases during the period when
affected firms and financial professionals remove the term
``adviser'' or ``advisor'' from their names and titles, investment
advisers that are not required to change their names or titles may
see an increase in the diversion of customer flow from broker-
dealers to investment advisers until investor confusion over the
change in titles subsides. To the extent that some investors that
are not currently making an efficient choice of a broker-dealer as
indicated by investor confusion about titles and associated
standards of conduct, and would choose an investment adviser after
the proposed rules were adopted, this proposed rule change may
assist them in making a more efficient choice to a service they
would prefer.
---------------------------------------------------------------------------

    In terms of additional potential benefits, investment advisers and
dual registrants, like standalone broker-dealers, will be subject to
the required disclosure of their registration status, as part of the
proposed rules. As we discussed in the case of standalone registered
broker-dealers above, the prominent display of registration status
could help reduce investor confusion, and could be used by both firms
and their financial professionals as a marketing tool. Moreover, firms
may benefit from this disclosure such that they can more effectively
signal their type, even if the firm or professional names or titles are
not perfectly aligned with the registration status. These potential
benefits may be larger for dual registrants, as the prominent display
of both their registrations may help attract investors that are looking
for both types of services or investors who are generally unsure about
which type of services they want.\697\
---------------------------------------------------------------------------

    \697\ However, as noted previously, all firms and financial
professionals can already voluntarily choose to prominently display
their registration status, therefore implying that the direct
benefits to firms and financial professionals from the proposed rule
requiring disclosure of registration status may be limited.
---------------------------------------------------------------------------

    The proposed restriction on the use of certain names and titles
would apply to financial professionals of dual registrant investment
advisers who are not supervised persons of an investment adviser or who
are supervised persons of an investment adviser but who do provide
investment advice on behalf of such investment adviser, which could
lead to costs for those financial professionals or their firms.
Consistent with the discussion of standalone registered broker-dealer
firms above, this segment of persons associated with dual registrants,
and the dual registrants themselves, could bear a potentially
substantial, one-time costs associated with the proposed rule to change
marketing materials and other communications to remove the restricted
terms and to explain the change to their customers. Further, some
financial professionals using the restricted terms could experience a
reduction in the efficiency of their marketing efforts. This could
happen to the extent the terms were optimally chosen in the first place
from a marketing perspective. This, in turn, might lead to fewer
customers for the financial professional and his or her associated firm
and a loss of revenue compared to the baseline. Furthermore, financial
professionals that are not currently supervised persons of an
investment adviser, or cannot immediately qualify to be hired in such a
professional role may become less attractive to retain or hire by dual
registrants, to the extent their services would be less valuable to
dual registrants if they cannot use the terms ``adviser'' or
``advisor'' in their names or titles. These financial professionals
could potentially mitigate the costs associated with the potential loss
of names or titles by becoming a supervised person of an investment
adviser and providing investment advice on behalf of such investment
adviser. A financial professional would likely pursue such a strategy
only if it expected the costs of becoming a supervised person of an
investment adviser who provides investment advice on behalf of such
investment adviser were lower than the expected costs of modifying
their professional names or titles.
    We expect the proposed requirements to prominently disclose
registration status to impose one-time direct compliance costs
associated with changes to written and electronic retail investor
communications on both investment advisers and dually registered
financial firms.\698\ Similar to standalone registered broker-dealers,
we expect that to the extent the required changes have a fixed-cost
component, smaller investment adviser firms would incur relatively
higher costs associated with this disclosure. Larger investment
advisers and dual registrants, however, would likely bear an increase
in the variable costs associated with such disclosures, as the amount
of revisions associated with individual representative's and firm's
communications will rise.\699\
---------------------------------------------------------------------------

    \698\ See infra Section V.H. for estimates of some of these
compliance costs developed for the purpose of the Paperwork
Reduction Act.
    \699\ Consistent with this argument, we estimate in the
Paperwork Reduction Act analysis in infra Section V.H.2, that the
initial one-time burden for complying with the disclosure
requirements would be 72 hours per large investment adviser and 15
hours per small investment adviser.
---------------------------------------------------------------------------

3. Impact on Efficiency, Competition, and Capital Formation
    In addition to the specific benefits and costs discussed in the
previous section, the Commission expects that the proposed disclosure
could cause some broader long-term effects on the market for financial
advice. Below, we elaborate on these possible effects, specifically
discussing the impact on efficiency, competition and capital formation.
a. Efficiency
    As discussed above, the proposed rules have the potential to reduce
investor confusion about the meaning of the names and titles used by
firms and their financial professionals and to improve the matching
between investor preferences and types of services they receive. To the
extent retail investors use titles and names in their search for firms
and financial professionals, the potential reduction in search costs
would improve the overall efficiency of the market for financial advice
by making the search process shorter in time and more cost effective.
Moreover, to the extent the proposed rules would reduce the risk of any
mismatch between investor preferences and the type of relationship
their financial professional provides, it could lead to potentially
improved efficiency in retail investors' asset allocation as investors
would be more likely to receive investment advice that is optimal for
their individual situation. A reduced risk of mismatch in the
relationship would also make it less likely that investors pay more
than necessary for the services they receive, which could lead to
higher investment returns net of cost.

    Alternatively, as discussed previously, investor confusion may
increase rather than decrease under certain circumstances, which would
increase search costs for investors. In this case, we would instead
expect a negative effect on efficiency. Moreover, there could also be
negative effects on efficiency to the extent affected broker-dealers
start using new names and titles that potentially convey the same
information to investors as the restricted terms. Under such
circumstances, the proposed rules would then only impose cost increases
on broker-dealers without achieving any reduction of investor
confusion. These costs may or may not be passed through to investors.
In addition, some of the other potential costs outlined previously
could have negative effects on efficiency. For example, this proposed
rule could have a direct negative impact on efficiency in the
registered broker-dealer segment of the market by making marketing less
efficient for any affected broker-dealers (including any affected dual
registrants with affected registered representatives). Further, any
compliance costs or increased marketing costs may be passed through to
investors in local markets where the competitive pressure is relatively
low--for example, due to, a relatively low supply of financial
professionals--and some investors may then face higher costs for
broker-dealer services as a result. Finally, some affected firms and
financial professionals may decide to exit the market if their costs of
doing business go up substantially, which could decrease supply and
increase costs of brokerage services for retail investors in some
segments of the market. Any such increases in costs of broker-dealer
services may also price some investors with limited ability to absorb a
cost increase out of the brokerage market altogether, thereby limiting
their access to advice and investment choices offered by broker-dealers
and potentially hurting the efficiency of their investment allocation.
    Because of the complexity associated with the use of names or
titles by firms and their financial professionals, and their potential
importance for investors both with respect to investor confusion and as
a selection mechanism for hiring financial professionals, coupled with
the lack of data on how investors could react to a restriction of the
use of certain names and titles among broker-dealers and their
associated natural persons, we are unable to provide estimates for the
potential effects on efficiency. However, we preliminarily believe that
any potential effects on the overall efficiency in the market for
financial advice, or in segments of this market, are likely to be
limited because of several factors that would mitigate the potential
impact on investor confusion and/or the potential costs imposed on
firms and financial professionals from the proposed restriction: (i)
Only a fraction of standalone registered broker-dealers and their
associated natural persons, as well as registered representatives
working for dual registrants that are not dual-hatted are currently
using the terms ``adviser'' and ``advisor'' in names and titles; \700\
(ii) the extent to which the proposed restriction would not affect the
use of terms such as ``advisory services'' in communications which do
not convey a name or title; (iii) financial intermediaries and
professionals not regulated by the Commission could still use the terms
``adviser'' or advisor'' in their names and titles.\701\
---------------------------------------------------------------------------

    \700\ The use of names and titles by firms and financial
professionals is discussed in Section IV.A.1.f. Only around 87
current standalone broker-dealers with retail investors use the
terms ``advisor'' or ``adviser'' in their company names. Further,
around 31% of professionals providing only brokerage services used
titles containing the terms ``adviser'' or ``advisor'' according to
the RAND Study.
    \701\ See discussion of other such financial intermediaries and
professionals in supra Section III.B.1.
---------------------------------------------------------------------------

    The proposed requirements to disclose a firm's regulatory status
and a financial professional's association may increase the efficiency
in the search and matching process in the market for financial advice
to the extent retail investors understand the meaning of the
registration status and would use it in their search for financial
professionals. Among firms, the potential efficiency benefits may be
larger for dual registrants, as the prominent display of both types of
registrations may help attract investors that are looking for both
brokerage services and an investment advice relationship, or investors
who are in general unsure about which type of services they want.
b. Competition
    The proposed rules could affect competition in the market for
financial advice through potential effects on both demand and supply in
the market. In terms of potential effects on demand, to the extent
search costs are reduced for investors, it may raise the price
elasticity of demand and consequently we would expect the competition
between firms in this market to increase.\702\ To the extent it is
primarily investors who prefer the services provided by investment
advisers who would experience a reduction in search costs, we would
expect in particular an increase in the average price elasticity of
demand for investment adviser services and therefore greater
competition in the investment adviser market segment. However, a
reduction in search cost may also increase retail investor
participation in the market for financial advice. Investors at the high
end of the search cost distribution who previously may have refrained
from seeking financial advice altogether may enter the market for
financial advice if there is a reduction in search costs. Because these
new entrants to the market for financial advice would likely have
higher search costs than the existing investors in the market, average
investor demand elasticity may go down, which in turn would reduce
competition at the margin.\703\ To the extent it is mainly investors
that prefer investment adviser services who would experience a
reduction in search costs; we expect the new entrants to primarily
belong to this group of investors. Therefore, the average demand
elasticity may potentially decrease in particular for investment
adviser services and reduce competition in the investment adviser
market segment.
---------------------------------------------------------------------------

    \702\ All else equal, we would expect customers in a marketplace
with differentiated products to prolong their search for the right
product at the right price if search costs are reduced. The
resulting increase in demand elasticity would increase downward
pressure on prices in the market, see, e.g. S. Anderson & R.
Renault, Pricing, Product Diversity, and Search Costs: A Bertrand-
Chamberlin-Diamond Model, The RAND Journal of Economics, 30, 719-735
(1999).
    \703\ For a theoretical model on how lower search costs may
increase the average price elasticity of demand in this manner, see,
e.g., J. L. Moraga-Gonz[aacute]lez, Z. S[aacute]ndor, & M.R.
Wildenbeest, Prices and heterogeneous search costs, The RAND Journal
of Economics, 48, 125-146 (2017). A study of the U.S. mutual fund
industry also provide empirical evidence consistent with this type
of effect; see A. Horta[ccedil]su & C. Syverson, Product
differentiation, search costs, and competition in the mutual fund
industry: A case study of S&P 500 Index funds, The Quarterly Journal
of Economics, Vol. 119, Issue 2, 403-456 (May 2004).
---------------------------------------------------------------------------

    Conversely, if investor confusion and associated search costs
instead are increased by the proposed rules, which as we discussed
previously may happen under certain circumstances, it would likely
lower price elasticity of demand among current retail investor market
participants and reduce competition in the market for financial advice.
However, if search costs are increased to the extent that current
investors at the high end of the search cost distribution are induced
to exit the market for financial advice altogether, it could instead
increase average demand elasticity and increase competition among the
firms in this market, as the

remaining investors would be those at the lower end of the search cost
distribution and consequently would have higher price sensitivity. To
the extent it is mainly investors that prefer broker-dealer services
who would experience an increase in search costs we expect the
investors exiting the market to primarily be such investors. Therefore,
the average demand elasticity may potentially increase in particular
for broker-dealer adviser services and increase competition in the
broker-dealer market segment.
    In terms of the effect on the supply of advice services, to the
extent the proposed restriction on the use of certain names or titles
would cause affected broker-dealers to register as investment advisers
and start promoting that side of their business, or perhaps completely
move to an investment adviser model, there would likely be a shift in
the mix of supply of advice services, where the supply of broker-dealer
(and associated registered representative) services could potentially
decrease and the supply of investment adviser services could increase.
Such a shift in the mix of the supply of advice services could
potentially raise brokerage account prices, reduce choice for investors
who prefer to pay for execution of trades on a transactional basis, and
lower the costs of advisory accounts with investment advisers. However,
to the extent some broker-dealers would exit the market for retail
investors altogether, the overall supply of advice services could go
down and we may see a decrease in competition not only in the market
for broker-dealer services but also in the overall market for
investment adviser services, assuming that retail investors view
broker-dealer and investment adviser services as substitutes for one
another, thereby increasing costs and limiting choices for retail
investors. This potential negative effect on competition would be
mitigated to the extent other firms (whether other broker-dealers or
investment advisers) decide to compete for the customers of any broker-
dealers exiting the market.
    Further, to the extent the proposed restriction would make
standalone broker-dealers services more costly and marketing less
effective, non-affected standalone broker-dealers (i.e., broker-dealers
that do not use the restricted terms), dual-registrants, investment
advisers, and financial intermediaries that are not registered as
investment advisers (such as banks, trust companies, insurance
companies, commodity trading advisers, and municipal advisors) may to a
varying degree gain business at these affected firms expense. That is,
by only affecting a subset of firms, the proposed restriction on the
use of certain names and titles may change competitive positions among
different suppliers in the market for financial advice. In addition,
the proposed requirement to disclose registration status may benefit
the competitive positon of dual registrants, as the prominent display
of both types of registrations may help attract investors that are
looking for both brokerage services and an investment advice
relationship, or investors who are in general unsure about which type
of services they want.
    In addition, assuming that small broker-dealers and investment
advisers select geographic areas where competition from larger firms is
low, then any reduction of competition in the broker-dealer market due
to a switch to an investment adviser business model would be
particularly large in such geographic areas. Similarly, any reduction
in competition due to exit of standalone registered broker-dealer
altogether from the retail market would be particularly large in such
geographic areas, where smaller investment advisers and dual
registrants could especially see competitive benefits at the expense of
small standalone registered broker-dealers.
    We are not able to assess the magnitude of the potential demand or
supply related effects as we do not have access to information that
would allow us to do so, such as the distribution of search costs
across the population of retail investors, estimates of the effect of
the proposed rules on search costs, the internal cost functions of
broker-dealers, etc. However, we preliminarily believe that the impact
of any effects on the overall competitive situation in the market for
financial advice is likely to be limited because of the same three
mitigating factors we discussed above regarding the potential impact on
efficiency.\704\
---------------------------------------------------------------------------

    \704\ See discussion of mitigating factors in supra Section
IV.C.3.a.
---------------------------------------------------------------------------

c. Capital Formation
    Some aspects of the proposed rules could lead to increased capital
formation, if, for example, retail investors are better able to
allocate capital due to a better match with financial professionals or
more retail investors enter the market for financial advice and start
investing in securities. However, as discussed above, if some broker-
dealers exit the market or move to an advisory business model as a
result of the proposed rules, some investors may lose access to the
market for advice serviced by broker-dealers, which may cause them to
exit the market for financial advice altogether and reduce their
(direct or indirect) investments in productive assets, thereby reducing
capital formation. Alternatively, any investors who lose access to
broker-dealers services may switch to an investment adviser
relationship, which could reduce their investment returns net of costs
to the extent the broker-dealer payment model was more optimal for
their investment preferences, thereby also potentially reducing capital
formation. Overall, the Commission is unable to determine how these
countervailing effects could impact capital formation, and what the
likely magnitude of those impacts would be. However, we preliminarily
believe that the proposed rules would have a limited impact on capital
formation because of the same three mitigating factors we discussed
above regarding the potential impact on efficiency.\705\
---------------------------------------------------------------------------

    \705\ See discussion of mitigating factors in supra Section
IV.C.3.a.
---------------------------------------------------------------------------

4. Alternatives to the Proposed Rules
    As discussed above, the proposed rule would restrict broker-dealers
and their associated natural persons from using as part of a name or
title the term ``adviser'' or ``advisor,'' unless such broker-dealer is
dually registered as an investment adviser or the associated natural
person is a supervised person of an investment adviser and provides
advice on behalf of such investment adviser. Further, our proposed
rules would also require both broker-dealers and investment advisers to
disclose their registration status in print or electronic retail
investor communications. Finally, the proposed rules would require
associated natural persons of a broker-dealer and supervised persons of
an investment adviser to disclose their association with a particular
firm in print or electronic retail investor communications. Below, the
Commission describes several alternatives to the proposed rules,
including the continued ability of broker-dealers to rely on section
202(a)(11)(C) of the Advisers Act (the ``Solely Incidental''
exclusion), prohibitions on a broker-dealer ``holding out'' as an
investment adviser, disclosure of the registration status only, or
additional requirements for dual registrants.

a. No ``Solely Incidental'' Exclusion
    As an alternative to the proposed rule restricting the use of the
term ``adviser'' or ``advisor'' in names and titles, the Commission
could propose a rule that stated that a broker-dealer cannot be
considered to provide investment advice solely incidental to the
conduct of its business as a broker-dealer under section 202(a)(11)(C)
of the Advisers Act if the broker-dealer used the term ``adviser'' or
``advisor'' in names or titles, and therefore, would not be excluded
from the definition of investment adviser. This alternative would rely
on the assumption that a broker-dealer that uses these terms in its
name to market or promote its services is doing so because its advice
is significant or even instrumental to its brokerage business, and
consequently, the broker-dealer's provision of advice is therefore no
longer solely incidental to its brokerage business. Similarly, it would
also rely on the assumption that if a broker-dealer invests its capital
into marketing, branding, and creating intellectual property in using
the terms ``adviser'' or ``advisor'' in its name or title, the broker-
dealer is indicating that advice is an important part of its broker-
dealer's business.
    This alternative, like the proposed rule, would not permit an
associated natural person of a dually registered firm to use the terms
``adviser'' or ``advisor'' in their names or titles unless such person
was a supervised person of a registered investment adviser who provides
investment advice on behalf of such investment adviser. For standalone
broker-dealers, and their associated natural persons as well as
associated natural person of a dually registered firm that are not
supervised persons of a registered investment adviser providing advice
on behalf of such investment adviser, that are currently marketing
their services to retail investors using the terms ``adviser'' and
``advisor,'' in their name or title, the economic effects of this
alternative would be expected to be substantially the same as under the
proposed restriction on the use of the terms in names and titles.
b. Prohibit Broker-Dealers From Holding Themselves Out as Investment
Advisers
    Instead of prohibiting a broker-dealer from using certain names or
titles, we could propose a rule to preclude a broker-dealer from
relying on the solely incidental exclusion of section 202(a)(11)(C) if
a broker-dealer ``held itself out'' as an investment adviser to retail
investors. This approach could encompass a broker-dealer and its
associated natural persons representing or implying through any
communication or other sales practice (including through the use of
names or titles) that they are offering investment advice subject to a
fiduciary relationship with an investment adviser.
    This approach would reduce the risk that by only proscribing
``adviser'' and ``advisor,'' or any other specific names and titles,
new names and titles could arise with similar, confusing connotations.
Moreover, this alternative could promote informed investor choices by
focusing more comprehensively on broker-dealer marketing and titles
that may confuse or mislead investors into believing that a brokerage
relationship is an advice relationship of the type provided by
investment advisers. Relative to either the baseline or the proposed
rule, the ``holding out'' alternative could have a broader application
because it could capture any communication or other sales practices
that may lead to confusion by investors in believing that their firms
or financial professionals provide more or different services than they
provide. As a result, investor confusion and associated costs may be
reduced more compared to the proposed rule.
    This alternative, however, could create uncertainty for broker-
dealers as to which activities (and the extent of such activities)
would be permissible and not considered ``holding out'' as an
investment adviser and therefore triggering the need to register as
such. As a result of a ``holding out'' alternative, broker-dealers may
feel compelled to avoid fully describing even the types of advisory
services they are allowed to provide in their communications and
marketing efforts and may also limit or reduce allowable advice
provided by broker-dealers to avoid any instances where the advice
provided could be misconstrued that such person is ``holding out'' as
an investment adviser. Given that broker-dealers under the current
regulatory environment are permitted to provide incidental advice
related to recommendations of securities or investment strategies,
investor confusion may be increased and some investors may believe that
as a result of the ``holding out'' alternative that this advice could
no longer be offered, and could face a mismatch in their preferences
and expectations if they sub-optimally choose to hire investment
advisers and avoid broker-dealers. Therefore, implementing a rule along
these lines could have significant competitive effects for broker-
dealers, and could reduce the effectiveness in how investors choose
their firms and financial professionals. As a result of increased
investor confusion, both search costs and costs associated with
choosing the wrong type of firm and financial professional could be
increased under this alternative. Moreover, if some broker-dealers
avoid providing advice as a result of this alternative, some retail
investors may be shut out of the advice market entirely or may have to
incur higher costs that may be associated with investment advisory
services.
    From a compliance cost perspective, broker-dealers that could be
subject to the ``holding out'' alternative would face costs in revising
their communications and advertisements in order to eliminate any
discussion about them implying they are offering investment advice
subject to a fiduciary relationship with an investment adviser. To the
extent such revisions have a significant fixed cost component or there
are other economies of scale, such as decreasing variable costs for
printed material as the number of copies increase, we would expect
smaller broker-dealers to face relatively higher costs following the
implementation of this alternative. There could also be increased costs
under this alternative from training and monitoring of associated
natural persons to ensure compliance with the rule, as the restrictions
would be more principles-based than prescriptive compared to the
proposed rule.
c. Disclosure of Registration Status Only
    The proposed rules both prohibit certain names or titles and
require disclosure of broker-dealer or investment adviser registration
status in all written and electronic retail investor communications of
broker-dealers and SEC-registered investment advisers, including those
of individual representatives, such as business cards, social media
profiles, and signature blocks on paper or electronic correspondence.
As an alternative to the proposed rules, the Commission could not
propose a restriction on the use of certain names or titles by
standalone registered broker-dealers, and solely propose requiring
disclosure of registration status in all written and electronic retail
investor communications given by the firm or its representatives.
    Although both broker-dealers and SEC-registered investment advisers
would have to bear the cost of including a disclosure of their
registration status in all written and electronic retail investor
communications under this alternative, they would have to bear this
cost under the proposed rules, as well.

This alternative, however, would allow broker-dealers to continue to
use titles or names that include ``Adviser/Advisor'' and therefore
would likely result in a lower overall cost of rebranding their
financial professionals or the firm itself in all other communications.
    While the costs of compliance with a disclosure of registration
status only requirement would be lower than under the proposed rules,
and would apply uniformly to all broker-dealers and investment
advisers, this alternative could be less effective in reducing investor
confusion over the titles or names used by financial professionals and
firms, and the implications of the types of services provided by, or
standard of conduct applicable to, these professionals to the extent
the registration status is uninformative to retail investors because
they do not understand the regulatory implications of a firm being
registered as either a broker-dealer or an investment adviser.
    Another potential, related, alternative would be to limit the
disclosure of registration status only to certain marketing
communications. The overall compliance costs to broker-dealers,
particularly small broker-dealers that are less likely to produce
advertising campaigns in either print media, television/radio
broadcasts, mass mailings, or on websites, would be lower than under
the requirements of the proposed rules for disclosure of registration
status in all communications. This alternative, however, would likely
reduce the potential benefits to retail investors, as only
``advertisements'' would be required to produce the disclosure of
registration status, and could increase both search costs and the
possibility of mismatch associated with choosing the wrong type of
financial firm or professional. To the extent small broker-dealers or
investment advisers are less likely to use these types of marketing
communications to reach potential customers relative to larger broker-
dealers and investment advisers (e.g., because there are fixed costs in
producing an advertisement, the reduction in benefits is more likely to
affect retail investors that use such small broker-dealers or
investment advisers). Therefore, the Commission preliminarily believes
that the potential compliance cost savings for limiting communications
that would require such disclosure do not justify the reduced level of
investor protection under such alternative.
    Another ``disclosure only'' alternative to the proposed restriction
on the use of the terms ``adviser'' and ``advisor'' in names and titles
would be to propose a rule that would provide that when any broker-
dealer not registered under the Advisers Act chooses to distribute
advertisements or other communications using the term ``adviser'' or
``advisor'' as part of a name or title, each use of the term would have
to include an asterisked disclaimer clarifying its registration status.
Under this alternative broker-dealers and their associated natural
persons could continue to use these terms in their names and titles in
retail investor communications, but investors would be potentially
alerted by the asterisk to the actual registration status of the
broker-dealer, which may reduce investors confusion about the type of
services provided the associated standard of care to the extent they
understand the meaning of the registration status. One limitation of
this alternative, as well as the other alternatives discussed in this
section, compared to the proposed rule is that some of the evidence on
investor perceptions discussed previously in Section IV.A.3 suggest
that many retail investors may not fully understand the meaning of the
registration status. Moreover, the asterisked declaimer may not be
salient enough to attract investors' attention to the disclaimer.
d. Additional Requirements for Dual Registrants
    We estimate that the number of dual registrants represents
approximately 13% of all retail broker-dealer firms and that
approximately 65% of registered representatives of retail broker-
dealers work at these dual registrants.\706\ Although the proposed rule
restricts supervised persons of dual registrants who do not provide
investment advice on behalf of such investment adviser, a percentage of
dually registered firms would not be affected by the proposed
restriction of certain names and titles. To address this issue, we
considered an alternative to the proposed rule which would prohibit the
name or title containing the terms ``adviser'' or ``advisor'' unless a
``a substantial part of the business consists of rendering investment
supervisory services.'' \707\ We also considered limiting dual
registrants' use of the term ``adviser'' or ``advisor'' to when they
provide advice to a retail investor in the capacity as an investment
adviser, and prohibiting dual registrants from using such terms when
acting in the capacity of a broker-dealer to a particular customer.
---------------------------------------------------------------------------

    \706\ As shown in supra Table 1, Panel B those broker-dealer
firms that were registered in a dual capacity were 360 of
approximately 2,857 firms (about 13%) as of December 31, 2017. Using
data from Form ADV filings, these 360 dually-registered firms had
approximately $4.3 trillion of AUM. As discussed in Section
IV.A,1.e, almost all registered financial professionals at dual
registrants are either dual-hatted or registered representatives.
Because dual registrants employ approximately 61% of all licensed
financial professionals (see supra Table 5) and approximately 94% of
all financial professionals are either dual hatted or registered
representatives (48/51 = 0.94; see supra Table 6), it means that
approximately 65% (0.61/0.94 = 0.65) of all registered
representatives, whether dual hatted or not, work at dual
registrants.
    \707\ See section 208(c) of the Advisers Act.
---------------------------------------------------------------------------

    Under this alternative, some of the investor pool may face reduced
confusion in their communications with their financial professional
with regard to the use of specific names and titles, because these
names and titles containing the term ``adviser'' or ``advisor'' would
be limited only to the accounts or the instances in which the financial
professional actually serves in the capacity as an investment adviser.
However, these alternatives for dual registrants would create
substantial compliance challenges for dual registrants. For example,
dual registrants would have to ensure the appropriate name or title is
being used when the financial professional is engaging in multiple
capacities with investors. Moreover, requiring financial professionals
that are dual registrants to tailor their names or titles based on what
capacity they are acting in could increase confusion to investors,
given that some dual registrants might act in broker-dealer and
investment adviser capacities for a single investor. For example, a
retail investor may have both a brokerage account and an advisory
account, and may receive advice related to both brokerage
recommendations as well as ongoing advice in the advisory account in a
single communication.
5. Request for Comments
    The Commission requests comment on all aspects of the economic
analysis, including the analysis of: (i) Potential benefits and costs
and other economic effects; (ii) long-term effects of the proposed
restriction on the use of certain titles and required disclosure of
registration status on efficiency, competition, and capital formation;
and (iii) reasonable alternatives to the proposed regulations. We also
request comments identifying sources of data and that could assist us
in analyzing the economic consequences of the proposed regulations.
    In addition to our general request for comment on the economic
analysis, we request specific comment on certain aspects of the
proposal:
     Do commenters agree with our assessment that the main
potential

benefits to retail investors are reduced search costs and a lower risk
of mismatch? Are there other benefits of the proposed rule that have
not been identified in our discussion and that warrant consideration?
Are the assumptions that form the basis of our analysis of the benefits
appropriate? Can commenters provide data that supports or opposes these
assumptions?
     Do commenters agree with our characterization of the
costs? Are the assumptions that form the basis of our analysis of the
costs appropriate? Are there other costs to investors of the proposed
rule that have not been identified in our discussion and that warrant
consideration? Can commenters provide data that supports or opposes
these assumptions?
     We request additional information on how retail investors
search for financial professionals. In particular, are there studies,
evidence or data available on how investors use company names and
titles of representatives in their search for a financial professional?
     We request comments on our characterization of the
benefits and costs to broker-dealers and investment advisers of the
proposed rule. Do commenters agree with our characterization of the
benefits and costs? Are there other benefits or costs of the proposed
rule that have not been identified in our discussion and that warrant
consideration? Are the assumptions that form the basis of our analysis
of the benefits and costs appropriate? Can commenters provide data that
supports or opposes these assumptions?
     We specifically request comments on the costs to broker-
dealers from having to change their company names as a result of the
rule. How costly do commenters believe it would be for affected
entities that would be required to their change current company names,
including the costs of marketing materials and advertisements? Do
broker-dealer company names have significant brand value? To what
extent does the brand value lie in terms such as ``adviser'' or
``advisor''?
     Do commenters believe standalone broker-dealers that would
be affected by the proposed rule may decide to register as an
investment advisers? Are there any specific types of standalone broker-
dealers that would be more likely to respond in this way? Do you
believe standalone broker-dealers registering as investment advisers
would affect their supply of brokerage services? What are the
compliance and indirect costs for broker-dealers who would seek to
register as an investment adviser? Is there additional data to estimate
such costs, either initially or on an ongoing basis?
     Are there any effects on efficiency, competition, and
capital formation that are not identified or are misidentified in our
economic analysis? Please be specific and provide data and analysis to
support your views.
     Do commenters believe that the alternatives the Commission
considered are appropriate? Are there other reasonable alternatives
that the Commission should consider? If so, please provide additional
alternatives and how their costs and benefits would compare to the
proposal.

D. Combined Economic Effects of Form CRS Relationship Summary and
Restrictions on the Use of Certain Titles and Required Disclosures
About a Firm's Regulatory Status

    Above, we have described the anticipated standalone economic
effects of the proposed Form CRS relationship summary and the proposed
restrictions on the use of certain titles and required disclosures
about a firm's regulatory status relative to the current baseline. In
this section, we discuss how we anticipate these economic effects could
change when considering both these proposed rules in combination.
    To the extent that investors may be confused and potentially misled
about what type of investment advice relationship is best for their
investing situation, being provided with the proposed Form CRS, along
with the proposed restriction on names and titles, could incrementally
reduce some of the investor confusion and mismatch risk. In particular,
if a retail investor communicates with a financial professional
associated with a dual registrant and the professional has a name or
title containing either of the terms ``adviser'' or ``advisor'' but
solely provides brokerage services, such investor would likely receive
the dually registered firm's relationship summary. Because Form CRS
would include a description of both business models, without the
restriction on names and titles and the requirement of disclosure of
registration status, some retail investors might incorrectly match the
services they would receive from this financial professional to the
description in the relationship summary of investment advisory
services. In this case, the proposed restriction on names or titles and
the requirement to disclose regulatory status would increase the
effectiveness of Form CRS by reducing the risk of any mismatch between
investor preferences and type of services received due to this kind of
misunderstanding, which in turn may lead to harm such as the investor
paying too much for advice if it if it leads to frequent trading. To
the extent investors who received a relationship summary shares it with
family and friends, the potential importance of having the restriction
on the use of certain names and titles would be increased, because it
could also reduce the risk of this type of misunderstanding being
spread to a greater set of retail investors.
    However, for those investors whose confusion about the differences
between broker-dealers' and investment advisers' services and standards
of conduct would be substantially reduced once receiving and reading a
firm's relationship summary we expect a reduced overall incremental
benefit of the proposed restriction on the use of certain names and
titles. Specifically, because such investors would learn about the
differences between broker-dealer and investment adviser services
through the relationship summary, they may be unlikely to hire the
wrong type of firm or financial professional even without the proposed
restriction on the use of certain names or titles.
    With respect to the initial search costs borne by investors, we do
not believe that the relationship summary would alter the incremental
effects the proposed restriction on certain names and titles may have
on search costs, because the proposed Form CRS would generally be
provided at a later stage in the search process (e.g., after initial
contact with a financial professional is made) relative to the initial
stage where names and titles of firms and financial professionals may
be a useful search tool to investors. Similarly, we do not believe that
the relationship summary would alter the incremental effects on search
costs from the proposed requirement to disclose registration status in
retail investor communications, because investors would likely
encounter communications disclosing a firm's registration status prior
to being provided a firm's relationship summary.
    We believe that the proposed Form CRS and the proposed required
disclosures of registration status would complement each other because
both are designed to reduce investor confusion. In particular, for less
knowledgeable investors, the disclosure of registration status may
raise awareness about the different forms of registration among
financial intermediaries and their associated natural persons and
prompt questions about the difference between registered broker-dealers
and registered investment advisers. The relationship summary
potentially could work in concert with the disclosure of

registration status to facilitate investors' learning about the
different types of financial firms and professionals because it would
highlight many of the key differences between investment advisers and
broker-dealers in different communications and different times,
consistent with the layered approach to disclosure that the
relationship summary is designed to further. Likewise, if the
disclosure of registration status makes such status more salient to
less knowledgeable investors, such disclosure may induce a more careful
reading of related parts in the relationship summary or provide
incentives to discuss the information contained in disclosure with a
financial professional. Thus, the combination of the disclosure of
registration status and the relationship summary may further help
facilitate the search process also for investors initially confused
about the difference between broker-dealers and investment advisers,
and help them ultimately better match to an appropriate financial
professional.
    However, for more knowledgeable investors, there may be some
overlap in function that could reduce the potential benefits to either
the relationship summary or the disclosure of regulatory status without
offsetting anticipated costs. As discussed previously, the disclosure
of registration status may help to reduce search costs for investors
who already understand the meaning of the registration status. These
relatively knowledgeable investors may therefore already be familiar
with some of the information in relationship summary by having
encountered the disclosure of the registration status beforehand. In
this case, the relationship summary may provide fewer additional
benefits for these investors in either reducing search costs or the
likelihood of mismatch, but would impose costs on both broker-dealers
and investment advisers that must produce both the relationship summary
and the disclosures of registration status.
    Finally, we note that any complementarities between the proposed
restrictions on the use of certain names and titles, required
disclosures about a firm's regulatory status, and the proposed
relationship summary would be constrained by the fact (1) the
relationship summary does not need to be provided by state-registered
standalone investment advisers and (2) these state-registered
investment advisers (and their supervised persons) would not be
required to provide registration status disclosures in retail investor
communications pursuant to this proposed rule.

V. Paperwork Reduction Act Analysis

    Certain provisions of our proposal contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\708\ The Commission is submitting
these collections of information to the Office of Management and Budget
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. The titles for the existing collections of information that we
are proposing to amend are (i) ``Form ADV'' (OMB control number 3235-
0049), (ii) ``Rule 204-2 under the Investment Advisers Act of 1940''
(OMB control number 3235-0278), (iii) ``Rule 17a-3; Records to be Made
by Certain Exchange Members, Brokers and Dealers'' (OMB control number
3235-0033) and (iv) ``Rule 17a-4; Records to be Preserved by Certain
Exchange Members, Brokers and Dealers'' (OMB control number 3235-0279).
The new collections of information relate to (i) ``Rule 204-5 under the
Investment Advisers Act of 1940,'' (ii) ``Form CRS and rule 17a-14
under the Exchange Act,'' (iii) ``Rule 15l-3 under the Securities
Exchange Act,'' and (iv) ``Rule 211h-1 under the Investment Advisers
Act of 1940.'' An agency may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless it
displays a currently valid control number. The Commission is also
including a short-form tear sheet for investors to provide feedback on
the relationship summary.\709\
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    \708\ 44 U.S.C. 3501 et seq.
    \709\ See Appendix F. The Commission determines that using this
short-form tear sheet to obtain information from investors is in the
public interest and will protect investors. See Securities Act
section 19(e).
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A. Form ADV

    Form ADV (OMB Control No. 3235-0049) is currently a two-part
investment adviser registration form. Part 1 of Form ADV contains
information used primarily by Commission staff, and Part 2 is the
client brochure. We are not proposing amendments to Part 1 or 2. We use
the information to determine eligibility for registration with us and
to manage our regulatory and examination programs. Clients use certain
of the information to determine whether to hire or retain an investment
adviser. The collection of information is necessary to provide advisory
clients, prospective clients and the Commission with information about
the investment adviser and its business, conflicts of interest and
personnel. Rule 203-1 under the Advisers Act requires every person
applying for investment adviser registration with the Commission to
file Form ADV. Rule 204-4 under the Advisers Act requires certain
investment advisers exempt from registration with the Commission
(``exempt reporting advisers'') to file reports with the Commission by
completing a limited number of items on Form ADV. Rule 204-1 under the
Advisers Act requires each registered and exempt reporting adviser to
file amendments to Form ADV at least annually, and requires advisers to
submit electronic filings through IARD. The paperwork burdens
associated with rules 203-1, 204-1, and 204-4 are included in the
approved annual burden associated with Form ADV and thus do not entail
separate collections of information. These collections of information
are found at 17 CFR 275.203-1, 275.204-1, 275.204-4 and 279.1 (Form ADV
itself) and are mandatory. Responses are not kept confidential.
    We are proposing to amend Form ADV to add a new Part 3, requiring
certain registered investment advisers to prepare and file a
relationship summary for retail investors. As with Form ADV Parts 1 and
2, we will use the information to determine eligibility for
registration with us and to manage our regulatory and examination
programs. Similarly, clients can use the information required in Part 3
to determine whether to hire or retain an investment adviser, as well
as what types of accounts and services are appropriate for their needs.
The collection of information is necessary to provide advisory clients,
prospective clients and the Commission with information about the
investment adviser and its business, conflicts of interest and
personnel. The proposal requiring investment advisers to deliver the
relationship summary is contained in a new collection of information
under proposed new rule 204-5 under the Advisers Act, which estimates
are discussed in Section V.B below. We are not proposing amendments to
Part 1 or 2 of Form ADV.\710\
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    \710\ We are proposing conforming technical amendments to the
General Instructions of Form ADV to add references to the Part 3,
but these amendments would not affect the burden of Part 1 or Part
2. See proposed amendments to Form ADV: General Instructions.
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1. Respondents: Investment Advisers and Exempt Reporting Advisers
    The respondents to current Form ADV are investment advisers
registered with the Commission or applying for registration with the
Commission and

exempt reporting advisers.\711\ As of December 31, 2017, 12,721
investment advisers were registered with the Commission, and 3,848
exempt reporting advisers report information to the Commission.
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    \711\ An exempt reporting adviser is an investment adviser that
relies on the exemption from investment adviser registration
provided in either section 203(l) of the Advisers Act because it is
an adviser solely to one or more venture capital funds or 203(m) of
the Advisers Act because it is an adviser solely to private funds
and has assets under management in the United States of less than
$150 million. An exempt reporting adviser is not a registered
investment adviser and therefore would not be subject to the
relationship summary requirements.
---------------------------------------------------------------------------

    As discussed in Section II above, we propose to adopt amendments to
Form ADV that would add a new Part 3, requiring certain registered
investment advisers to prepare and file a relationship summary for
retail investors. Only those registered investment advisers offering
services to retail investors would be required to prepare and file a
relationship summary. Based on IARD system data, the Commission
estimates that 7,625 investment advisers provide advice to individual
high net worth and individual non-high net worth clients.\712\
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    \712\ Based on responses to Item 5.D. of Form ADV. These
advisers indicated that they advise either high net worth
individuals or individuals (other than high net worth individuals),
which includes trusts, estates, and 401(k) plans and IRAs of
individuals and their family members, but does not include
businesses organized as sole proprietorships. The proposed
definition of retail investor would include a trust or other similar
entity that represents natural persons, even if another person is a
trustee or managing agent of the trust. We are not able to
determine, based on responses to Form ADV, exactly how many advisers
provide investment advice to these types of trusts or other
entities; however, we believe that these advisers most likely also
advise individuals and are therefore included in our estimate.
---------------------------------------------------------------------------

    This would leave 5,096 registered investment advisers that do not
provide advice to retail investors \713\ and 3,848 exempt reporting
advisers that would not be subject to Form ADV Part 3 requirements, but
are included in the PRA analysis for purposes of updating the overall
Form ADV information collection.\714\ We also note that these figures
include the burdens for 366 registered broker-dealers that are dually
registered as investment advisers as of December 31, 2017.\715\
---------------------------------------------------------------------------

    \713\ 12,721 registered investment advisers--7,625 = 5,096
registered investment advisers not providing advice to retail
investors.
    \714\ Based on IARD system data.
    \715\ See supra note 457.
---------------------------------------------------------------------------

2. Changes in Burden Estimates and New Burden Estimates
    Based on the prior revision of Form ADV,\716\ the currently
approved total aggregate annual hour burden estimate for all advisers
of completing, amending and filing Form ADV (Part 1 and Part 2) with
the Commission is 363,082 hours, or a blended average of 23.77 hours
per adviser,\717\ with a monetized total of $92,404,369, or $6,051 per
adviser.\718\ The currently approved annual cost burden is $13,683,500.
This burden estimate is based on: (i) The total annual collection of
information burden for SEC-registered advisers to file and complete
Form ADV (Part 1 and Part 2); and (ii) the total annual collection of
information burden for exempt reporting advisers to file and complete
the required items of Part 1A of Form ADV. Broken down by adviser type,
the current approved total annual hour burden is 29.22 hours per SEC-
registered adviser, and 3.60 hours per exempt reporting adviser.\719\
The proposed amendments would increase the current burden estimate due
in part to the proposed amendments to Form ADV to add Form ADV Part 3:
Form CRS (the relationship summary) and the increased number of
investment advisers and exempt reporting advisers since the last burden
estimate. We are not proposing any changes to Part 1 or Part 2 of Form
ADV.
---------------------------------------------------------------------------

    \716\ See Form ADV and Investment Advisers Act Rules, Final
Rule, Investment Advisers Act Release No. 4509 (Aug. 25, 2016) [81
FR 60418 (Sep. 1, 2016)] (``2016 Form ADV Paperwork Reduction
Analysis'').
    \717\ 363,082 hours/(12,024 registered advisers + 3,248 exempt
reporting advisers) = 23.77 hours.
    \718\ $92,404,369 hours/(12,024 registered advisers + 3,248
exempt reporting advisers) = $6,051.
    \719\ See 2016 Form ADV Paperwork Reduction Analysis, supra note
716, at 81 FR 60454.
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    The proposed amendments to Form ADV to add Part 3 would increase
the information collection burden for registered investment advisers
with retail investors. As discussed above in Section II, we propose to
adopt amendments to Form ADV, under Part 3, that would require certain
registered investment advisers to prepare and file a relationship
summary for retail investors. Only those registered investment advisers
providing services to retail investors would be required to prepare and
file a relationship summary. We propose to require that those
investment advisers file their relationship summaries with the
Commission electronically through IARD in the same manner as they
currently file Form ADV Parts 1 and 2. Investment advisers also would
need to amend and file an updated relationship summary within 30 days
whenever any information becomes materially inaccurate.
    As noted in Section V.A.1 above, not all investment advisers would
be required to prepare and file the relationship summary. For those
investment advisers, the per adviser annual hour burden for meeting
their Form ADV requirements would remain the same, in particular, 29.22
hours per registered investment adviser without relationship summary
obligations. Similarly, because exempt reporting advisers also would
not have relationship summary obligations, the annual hour burden for
exempt reporting advisers to meet their Form ADV obligations would
remain the same, at 3.60 hours per exempt reporting adviser. However,
although we are not proposing changes to Form ADV Part 1 and Part 2,
and the per adviser information collection burden would not increase
for those without the obligation to prepare and file the relationship
summary, the information collection burden attributable to Parts 1 and
2 of Form ADV would increase due to an increase in the number of
registered investment advisers and exempt reporting advisers since the
last information collection burden estimate. In this section, we
discuss the increase in burden for Form ADV overall attributable to the
proposed amendments, i.e., new Form ADV Part 3: Form CRS, and the
increase due to the updated number of respondents that would not be
subject to the proposed amendments.
a. Initial Preparation and Filing of Relationship Summary
    For investment advisers that provide advice to retail investors, we
estimate that the initial first year burden for preparing and filing
the relationship summary would be five hours per registered adviser. As
discussed above, much of the language of the proposed relationship
summary is prescribed. Furthermore, much of the information proposed to
be required in the relationship summary overlaps with that required by
Form ADV Part 2 and therefore should be readily available to registered
investment advisers because of their existing disclosure obligations.
Investment advisers also already file the Form ADV Part 2 brochure on
IARD, and we have considered this factor in determining our estimate of
the additional burden to file Form ADV Part 3: Form CRS. In addition,
the narrative descriptions required in the relationship summary should
be narrowly tailored and brief, and the relationship summary must be
limited to four pages (or

equivalent limit if in electronic format). Thus, while we recognize
that different firms may require different amounts of time to prepare
the relationship summary, we believe that this is an appropriate
average number for estimating an aggregate amount for the industry for
purposes of the PRA analysis. Moreover, a considerable amount of
language within each topic area also would be prescribed, thereby
limiting the amount of time required to prepare the relationship
summary. Based on these factors, we believe that the estimate of five
hours to prepare and file the relationship summary is appropriate. We
therefore estimate that the total burden of preparing and filing the
relationship summary would be 38,125 hours.\720\ As with the
Commission's prior Paperwork Reduction Act estimates for Form ADV, we
believe that most of the paperwork burden would be incurred in
advisers' initial preparation and submission of Part 3: Form CRS, and
that over time this burden would decrease substantially because the
paperwork burden would be limited to updating information.\721\ As
under the currently approved collection, the estimated initial burden
associated with preparing the relationship summary would be amortized
over the estimated period that advisers would use the relationship
summary, i.e., over a three-year period.\722\ The annual hour burden of
preparing and filing the relationship summary would therefore be
12,708.\723\ In addition, based on IARD system data, the Commission
assumes that 1,000 new investment advisers will file Form ADV with us
annually. Of these, we estimate that 477 would be required to prepare
and file the relationship summary.\724\ Therefore, the aggregate
initial burden for newly registered advisers to prepare the
relationship summary would be 2,385 \725\ and, amortized over three
years, 795 on an annual basis.\726\ In sum, the annual hour burden for
existing and newly registered investment advisers to prepare and file a
relationship summary would be 13,503 hours,\727\ or 1.67 hours per
adviser.\728\
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    \720\ 5.0 hours x 7,625 investment advisers = 38,125 total
aggregate initial hours.
    \721\ We discuss the burden for advisers making annual updating
amendments to Form ADV in Section V.A.3 below.
    \722\ See 2016 Form ADV Paperwork Reduction Analysis, supra note
716.
    \723\ 5.0 hours x 7,625 investment advisers/3 = 12,708 total
annual aggregate hours.
    \724\ The number of new investment advisers is calculated by
looking at the number of new advisers in 2016 and 2017 and then
determining the number each year that serviced retail investors.
(455 for 2016 + 499 for 2017)/2 = 477.
    \725\ 477 new RIAs required to prepare relationship summary x
5.0 hours = 2,385 hours for new RIAs to prepare relationship
summary.
    \726\ 477 x 5.0 hours/3 = 795.
    \727\ (38,125 + 2,385)/3 years = 13,503 annual hour burden for
existing and new advisers to prepare and file relationship summary.
    \728\ 13, 503 hours/(7,625 existing advisers + 477 new advisers)
= 1.67 hours per year.
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b. Estimated External Costs for Investment Advisers Preparing the
Relationship Summary
    The currently approved total annual collection of information
burden estimate for Form ADV anticipates that there will be external
costs, including (i) a one-time initial cost for outside legal and
compliance consulting fees in connection with the initial preparation
of Part 2 of Form ADV, and (ii) the cost for investment advisers to
private funds to report the fair value of their private fund
assets.\729\ We do not anticipate that the amendments we are proposing
today will affect the per adviser cost burden for those existing
requirements but anticipate that some advisers may incur a one-time
initial incremental cost for outside legal and consulting fees in
connection with the initial preparation of the relationship summary. We
do not anticipate external costs to investment advisers in the form of
website set-up, maintenance, or licensing fees because they would not
be required to establish a website for the sole purpose of posting
their relationship summary if they do not already have a website. We
also do not expect other ongoing external costs for the relationship
summary. Although advisers would be required to amend the relationship
summary within 30 days whenever any information becomes materially
inaccurate, given the standardized nature and prescribed language of
the relationship summary, we expect that amendments would be factual
and require relatively minimal wording changes. We believe that the
investment adviser would be more knowledgeable about these facts than
outside legal or compliance consultants and would be able to make these
revisions in-house. Therefore, we do not expect that investment
advisers will need to incur ongoing external costs for the preparation
and review of relationship summary amendments. Although advisers that
would be subject to the relationship summary requirement may vary
widely in terms of the size, complexity and nature of their advisory
business, we believe that the amount of disclosure required would not
vary substantially among advisers. Accordingly, we believe that the
amount of time, and thus cost, required for outside legal and
compliance review is unlikely to vary substantially among those
advisers who elect to obtain outside assistance.\730\
---------------------------------------------------------------------------

    \729\ See 2016 Form ADV Paperwork Reduction Analysis, supra note
716, at 81 FR 60452. We do not anticipate that the amendments we are
proposing to add Form ADV Part 3 will affect those per adviser cost
burden estimates for outside legal and compliance consulting fees.
The estimated external costs of outside legal and consulting
services for the relationship summary are in addition to the
estimated hour burden discussed above.
    \730\ We estimate that an external service provider would spend
3 hours helping an adviser prepare an initial relationship summary.
In estimating the external cost for the initial preparation of Form
ADV Part 2, we estimated that small, medium, and large advisers
would require 8, 11, and 26 hours of outside assistance,
respectively, to prepare Form ADV Part 2. In comparison, as
discussed above, the relationship summary is limited to four pages
in length (or equivalent limit if in electronic format) and is
standardized across investment advisers in terms of the mandated
selection and sequence of topic areas. While we recognize that
different firms may require different amounts of external assistance
in preparing the relationship summary, we believe that this is an
appropriate average number for estimating an aggregate amount for
the industry purposes of the PRA analysis. See Brochure Adopting
Release, supra note 157, at 75 FR at 49257.
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    Most of the information proposed to be required in the relationship
summary is readily available to investment advisers from Form ADV Part
2, and the narrative descriptions are narrowly tailored and brief or
prescribed. As a result, we anticipate that a quarter of advisers will
seek the help of outside legal services and half will seek the help of
compliance consulting services in connection with the initial
preparation of the relationship summary. We estimate that the initial
per existing adviser cost for legal services related to the preparation
of the relationship summary would be $1,416.\731\ We estimate that the
initial per existing adviser cost for compliance consulting services
related to the preparation of the relationship summary would be
$2,109.\732\ Thus, the incremental external cost burden for existing
investment advisers is estimated to be $10,739,813, or $3,579,938
annually when amortized over a three-year

period.\733\ In addition, we assume that 1,000 new advisers will
register with us annually, 477 of which would be required to prepare a
relationship summary. For these 477 new advisers, we estimate that they
will require $671,855 in external costs to prepare the relationship
summary.\734\ In summary, the annual external legal and compliance
consulting cost for existing and new advisers relating to relationship
summary obligations is estimated to total $4,251,792, or $525 per
adviser.\735\
---------------------------------------------------------------------------

    \731\ External legal fees are in addition to the projected hour
per adviser burden discussed above. $472 per hour for legal services
x 3 hours per adviser = $1,416. The hourly cost estimate of $472 is
based on an inflation-adjusted figure and our consultation with
advisers and law firms who regularly assist them in compliance
matters.
    \732\ External compliance consulting fees are in addition to the
projected hour per adviser burden discussed above. Data from the
SIFMA Management and Professional Earnings Report, modified to
account for an 1,800-hour work year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, and overhead, and
adjusted for inflation (``SIFMA Management and Professional Earnings
Report''), suggest that outside management consulting services cost
approximately $703 per hour. $703 per hour for outside consulting
services x 3 hours per adviser = $2,109.
    \733\ 25% x 7,625 existing advisers x $1,416 for legal services
= $2,699,250 for legal services. 50% x 7,625 existing advisers x
$2,109 for compliance consulting services = $8,040,563. $2,699,250 +
$8,040,563 = $10,739,813 in external legal and compliance consulting
costs for existing advisers. $10,739,813/3 = $3,579,938 annually.
    \734\ 25% x 477 new advisers x $1,416 for legal services =
$168,858. 50% x 477 new advisers x $2,109 for compliance consulting
services = $502,997. $168,858 + $502,997 = $671,855 annually in
external legal and compliance consulting costs for newly registered
advisers.
    \735\ $3,579,938 in external legal and compliance consulting
costs for existing advisers + $671,855 for new advisers = $4,251,792
annually for existing and new advisers. $4,251,792/($7,625 existing
advisers + 477 new advisers) = $525 per adviser.
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c. Amendments to the Relationship Summary and Filing of Amendments
    The current approved information collection burden for Form ADV
also includes the hour burden associated with annual and other
amendments to Form ADV, among other requirements. We anticipate that
the proposed relationship summary would increase the annual burden
associated with Form ADV by 0.5 hours \736\ due to amendments to the
relationship summary,\737\ for those advisers required to prepare and
file a relationship summary. We do not expect amendments to be
frequent, but based on the historical frequency of amendments made on
Form ADV Parts 1 and 2, estimate that on average, each adviser
preparing a relationship summary will likely amend the disclosure an
average of 1.80 times per year.\738\ The collection of information
burden of 0.5 hours for amendments to the relationship summary would
include filing it. Based on the number of other-than-annual amendments
filed by investment advisers with retail investors last year, we
estimate that advisers will file an estimated total of 1.80 \739\
relationship summary amendments per year for an estimated total
paperwork burden of 6,878 hours per year.\740\
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    \736\ We have previously estimated that investment advisers
would incur 0.5 hours to prepare an interim (other-than-annual)
amendment to Form ADV. See 2016 Form ADV Paperwork Reduction
Analysis, supra note 716, at 81 FR at 60452. We believe that an
amendment to the relationship summary would take a similar amount of
time, if not less.
    \737\ Similarly, we estimated that 0.5 hours would be required
for interim updating amendments to Form ADV Part 2. See Brochure
Adopting Release, supra note 157, at 75 FR at 49257.
    \738\ This estimate is based on IARD system data regarding the
number of filings of Form ADV amendments.
    \739\ Based on IARD data, 7,625 investment advisers with retail
clients filed 13,756 other-than-annual amendments to Form ADV.
13,756 other-than-annual amendments/7,625 investment advisers = 1.80
amendments per investment adviser.
    \740\ 7,625 investment advisers amending relationship summaries
x 1.80 amendments per year x 0.5 hours = 6,878 hours.
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d. Incremental Increase to Form ADV Hourly and External Cost Burdens
Attributable to Proposed Amendments
    For existing and newly-registered advisers with relationship
summary obligations, the additional burden attributable to amendments
to Form ADV to add Part 3: Form CRS, (including the initial preparation
and filing of the relationship summary and amendments thereto) totals
20,381 hours,\741\ or 2.52 hours per adviser,\742\ and a monetized cost
of $5,248,193, or $648 per adviser.\743\ The incremental external legal
and compliance cost is estimated to be $4,251,792.\744\
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    \741\ 13,503 hours for initial preparation and filing of the
relationship summary + 6,878 hours for amendments to the
relationship summary = 20,381 total aggregate annual hour burden
attributable to the Form ADV amendments to add Part 3: Form CRS.
    \742\ 20,381 hours/(7,625 existing advisers + 477 newly
registered advisers) = 2.52 hours per adviser.
    \743\ 20,381 total aggregate annual hour burden for preparing
and filing a relationship summary. We expect that performance of
this function will most likely be equally allocated between a senior
compliance examiner and a compliance manager. Data from the SIFMA
Management and Professional Earnings Report suggest that costs for
these positions are $229 and $298 per hour, respectively. 20,381
hours x 0.5 x $229 = $2,211,375. 20,381 hours x 0.5 x $298 =
$3,036,819. $2,211,375 + $3,036,819 = $5,248,193. $5,248,193/(7,625
existing registered advisers + 477 newly registered advisers) = $648
per adviser.
    \744\ See supra note 735.
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3. Total Revised Burden Estimates for Form ADV
a. Revised Hourly and Monetized Value of Hourly Burdens
    As discussed above, the currently approved total aggregate annual
hour burden for all registered advisers completing, amending, and
filing Form ADV (Part 1 and Part 2) with the Commission is 363,082
hours, or a blended average per adviser burden of 23.77 hours, with a
monetized cost of $92,404,369, or $6,051 per adviser. This includes the
total annual hour burden for registered advisers of 351,386 hours, or
29.22 hours per registered adviser, and 11,696 hours for exempt
reporting advisers, or 3.60 hours per exempt reporting adviser. For
purposes of updating the total information collection based on the
proposed amendments to Form ADV, we consider three categories of
respondents, as noted above: (i) Existing and newly-registered advisers
preparing and filing a relationship summary, (ii) registered advisers
with no obligation to prepare and file a relationship summary, and
(iii) exempt reporting advisers.
    For existing and newly-registered advisers preparing and filing a
relationship summary, including amendments to the disclosure, the total
annual collection of information burden for preparing all of Form ADV,
updated to reflect the proposed amendments to Form ADV, equals 31.74
hours per adviser, with 2.52 hours attributable to the proposed
amendments.\745\ On an aggregate basis, this totals 257,122 hours for
existing and newly registered advisers, with a monetized value of
$66,208,857.\746\
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    \745\ 29.22 hours + 2.52 hours for increase in burden
attributable to initial preparation and filing of, and amendments
to, relationship summary = 31.74 hours total.
    \746\ 31.74 hours x 7,625 existing RIAs required to prepare a
relationship summary + 477 newly registered RIAs required to prepare
a relationship summary = 257,122 total aggregate annual hour burden
for preparing, filing and amending a relationship summary. We expect
that performance of this function will most likely be equally
allocated between a senior compliance examiner and a compliance
manager. Data from the SIFMA Management and Professional Earnings
Report suggest that costs for these positions are $229 and $298 per
hour, respectively. 257,122 hours x 0.5 x $229 = $27,897,712.
257,122 hours x 0.5 $298 = $38,311,144. $27,897,712 + $38,311,144 =
$66,208,857.
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    As noted above, we estimate 5,096, or approximately 40% of existing
registered advisers, would not have retail investors; therefore, they
would not be obligated to prepare and file relationship summaries, so
their annual per adviser hour burden would remain unchanged.\747\ To
that end, using the currently approved total annual hour estimate of
29.22 hours per registered investment adviser to prepare and amend Form
ADV, we estimate that the updated annual hourly burden for all existing
and newly-registered investment advisers not required to prepare a
relationship summary would be 164,187,\748\ with a monetized value

of $43,263,322.\749\ The revised total annual collection of information
burden for exempt reporting advisers, using the currently approved
estimate of 3.60 hours per exempt reporting adviser, would be 15,653
hours,\750\ for a monetized cost of $4,124,513, or $949 per exempt
reporting adviser.\751\
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    \747\ 12,721 registered investment advisers--7,625 registered
investment advisers with retail investors = 5,096 registered
investment advisers without retail investors.
    \748\ 29.22 hours x (5,096 existing and 523 newly-registered
investment advisers without retail investors) = approximately
164,187 total annual hour burden for RIAs not preparing a
relationship summary.
    \749\ We expect that performance of this function for registered
advisers will most likely be equally allocated between a senior
compliance examiner and a compliance manager. Data from the 2018
SIFMA Management and Professional Earnings Report suggest that costs
for these positions are $229 and $298 per hour, respectively.
164,187 hours x 0.5 x $229 = $18,799,432. 164,187 hours x 0.5 x $298
= $24,463,890. $18,799,432 + $24,463,890 = $43,263,322.
    \750\ 3.60 hours x 3,848 exempt reporting advisers currently +
500 new exempt reporting advisers = 15,653 hours.
    \751\ As with preparation of the Form ADV for registered
advisers, we expect that performance of this function for exempt
reporting advisers will most likely be equally allocated between a
senior compliance examiner and a compliance manager. Data from the
2018 SIFMA Management and Professional Earnings Report suggest that
costs for these positions are $229 and $298 per hour, respectively.
15,653 hours x 0.5 x $229 = $1,792,246. 15,653 hours x 0.5 x $298 =
$2,322,267. $1,792,246 + $2,322,267 = $4,124,513. $4,124,513/(3,848
exempt reporting advisers currently + 500 new exempt reporting
advisers) = $949 per exempt reporting adviser.
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    In summary, factoring in the proposed amendments to Form ADV to add
Part 3, the revised aggregate burden for Form ADV for all registered
advisers and exempt reporting advisers would be 436,962,\752\ for a
monetized cost of $115,139,422.\753\ This results in a blended average
per adviser burden for Form ADV of 26.37 hours \754\ and $6,949 per
adviser.\755\ This is an increase of 73,880 hours, \756\ or $22,735,053
\757\ in the monetized value of the hour burden, from the currently
approved annual aggregate burden estimates, increases which are
attributable primarily to the proposed burden estimates on the larger
registered investment adviser and exempt reporting adviser population
since the most recent approval, adjustments for inflation, and the
amendments to Form ADV.
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    \752\ 257,122 annual hour burden for RIAs preparing relationship
summary + 164,187 annual hour burden for RIAs not preparing
relationship summary + 15,653 annual hour burden for exempt
reporting advisers = 436,962 total updated Form ADV annual hour
burden.
    \753\ $66,208,857 for RIAs preparing relationship summary +
$43,263,890 for RIAs not preparing relationship summary + $4,124,513
for exempt reporting advisers = $115,139,422 total updated Form ADV
annual monetized hourly burden.
    \754\ 436,962/(12,721 registered investment advisers + 3,843
exempt reporting advisers) = 26.37 hours per adviser.
    \755\ $115,139,422/12,721 registered investment advisers + 3,843
exempt reporting advisers) = $6,949 per adviser.
    \756\ 436,962 hours estimated--363,082 hours currently approved
= 73,880 hour increase in aggregate annual hourly burden.
    \757\ $115,139,422 monetized hourly burden-$92,404,369 =
$22,735,053 increase in aggregate annual monetized hourly burden.
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b. Revised Estimated External Costs for Form ADV
    The currently approved total annual collection of information
burden estimate for Form ADV anticipates that there will be external
costs, including (i) a one-time initial cost for outside legal and
compliance consulting fees in connection with the initial preparation
of Part 2 of Form ADV, and (ii) the cost for investment advisers to
private funds to report the fair value of their private fund
assets.\758\ The currently approved annual cost burden for Form ADV is
$13,683,500, $3,600,000 of which is attributable to external costs
incurred by new advisers to prepare Form ADV Part 2, and $10,083,500 of
which is attributable to obtaining the fair value of certain private
fund assets.\759\ We do not expect any change in the annual external
costs relating to new advisers preparing Form ADV Part 2. Due to the
slightly higher number of registered advisers with private funds,
however, the cost of obtaining the fair value of private fund assets
may be higher. We estimate that 6% of registered advisers have at least
one private fund client that may not be audited. Based on IARD system
data as of December 31, 2017, 4,670 registered advisers advise private
funds. We therefore estimate that approximately 281 registered advisers
may incur costs of $37,625 each on an annual basis, for an aggregate
annual total cost of $10,572,625.\760\
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    \758\ See 2016 Form ADV Paperwork Reduction Analysis, supra note
716, at 81 FR 60452. We do not anticipate that the amendments we are
proposing to add to Form ADV Part 3 will affect those per adviser
cost burden estimates for outside legal and compliance consulting
fees. The estimated external costs of outside legal and compliance
consulting services for the relationship summary are in addition to
the estimated hour burden discussed above.
    \759\ See 2016 Form ADV Paperwork Reduction Analysis, supra note
716, at 81 FR at 60452-53. The $10,083,500 is based on 4,469
registered advisers reporting private fund activity as of May 16,
2016.
    \760\ 6% x 4,760 = 281 advisers needing to obtain the fair value
of certain private fund assets. 281 advisers x $37,625 =
$10,572,625.
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    In summary, taking into account (i) a one-time initial cost for
outside legal and compliance consulting fees in connection with the
initial preparation of Part 2 of Form ADV, (ii) the cost for investment
advisers to private funds to report the fair value of their private
fund assets, and (iii) the incremental external legal or compliance
costs for the preparation of the proposed relationship summary, we
estimate the annual aggregate external cost burden of the Form ADV
information collection would be $18,424,417, or $1,448 per registered
adviser.\761\ This represents a $4,740,917 increase from the current
external costs estimate for the information collection.\762\
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    \761\ $3,600,000 for preparation of Form ADV Part 2 +
$10,572,625 for registered investment advisers to fair value their
private fund assets + $4,251,792 to prepare relationship summary =
$18,424,417 in total external costs for Form ADV. $18,424,417/12,721
total registered advisers as of December 31, 2017 = $1,448 per
registered adviser.
    \762\ $18,424,417 - $13,683,500 = $4,740,917.
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B. Rule 204-2 Under the Advisers Act

    Under section 204 of the Advisers Act, investment advisers
registered or required to register with the Commission under section
203 of the Advisers Act must make and keep for prescribed periods such
records (as defined in section 3(a)(37) of the Exchange Act), furnish
copies thereof, and make and disseminate such reports as the
Commission, by rule, may prescribe as necessary or appropriate in the
public interest or for the protection of investors. Rule 204-2 sets
forth the requirements for maintaining and preserving specified books
and records. We are proposing amendments to rule 204-2 that would
require registered advisers to retain copies of each relationship
summary. Investment advisers would also be required to maintain each
amendment to the relationship summary as well as to make and preserve a
record of dates that each relationship summary and each amendment was
delivered to any client or to any prospective client who subsequently
becomes a client, as well as to any retail investor before such retail
investor opens an account. These records would be required to be
maintained in the same manner, and for the same period of time, as
other books and records required to be maintained under rule 204-2(a),
to allow regulators to access the relationship summary during an
examination. Specifically, investment advisers would be required to
maintain and preserve a record of the relationship summary in an easily
accessible place for not less than five years from the end of the
fiscal year during which the last entry was made on such record, the
first two years in an appropriate office of the investment adviser.
This collection of information is found at 17 CFR 275.204-2 and is
mandatory. The Commission staff uses the collection of information in
its examination and oversight program. Requiring maintenance of these
disclosures as part of the firm's books and records would facilitate
the Commission's ability to inspect for and enforce compliance with
firms' obligations with respect to Form CRS.

The information generally is kept confidential.\763\
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    \763\ See section 210(b) of the Advisers Act (15 U.S.C. 80b-
10(b)).
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    The likely respondents to this collection of information are all of
the approximately 12,721 advisers currently registered with the
Commission. We estimate that based on updated IARD data as of December
31, 2017, 7,625 existing advisers will be subject to the amended
provisions of rule 204-2 to preserve the relationship summary as a
result of the proposed amendments.
1. Changes in Burden Estimates and New Burden Estimates
    The approved annual aggregate burden for rule 204-2 is currently
2,199,791 hours, with a total annual aggregate monetized cost burden of