the broker-dealer satisfied its obligations under proposed Regulation
Best Interest.
    Rather, proposed Regulation Best Interest is designed to address
the harm associated with broker-dealer incentives to recommend products
for reasons that put the broker-dealer's interest ahead of the
customer's interest (e.g., because of higher compensation or other
financial incentives for the broker-dealer). Nevertheless, we are
sensitive to the potential that, in order to meet their obligations
under the proposed Regulation Best Interest, broker-dealers may, for
compliance and business reasons, determine to avoid offering certain
products or limit recommendations to only certain low-cost and low-risk
products that would appear on their face to satisfy the proposed best
interest obligation. We emphasize that is not the intent of this
proposal, and we request comment on the extent to which proposed
Regulation Best Interest would result in broker-dealers limiting access
to or eliminating certain products in a manner that could, in and of
itself, cause harm to certain retail customers for whom those products
are consistent with their investment objectives and in their best
interest.
    Specifically, as further clarification, proposed Regulation Best
Interest would not per se prohibit a broker-dealer from transactions
involving conflicts of interest, such as the following:
     Charging commissions or other transaction-based fees;
     Receiving or providing differential compensation based on
the product sold;
     Receiving third-party compensation;
     Recommending proprietary products, products of affiliates
or a limited range of products;
     Recommending a security underwritten by the broker-dealer
or a broker-dealer affiliate, including initial public offerings
(``IPOs'');
     Recommending a transaction to be executed in a principal
capacity;
     Recommending complex products;
     Allocating trades and research, including allocating
investment opportunities (e.g., IPO allocations or proprietary research
or advice) among different types of customers and between retail
customers and the broker-dealer's own account;
     Considering cost to the broker-dealer of effecting the
transaction or strategy on behalf of the customer (for example, the
effort or cost of buying or selling an illiquid security); or
     Accepting a retail customer's order that is contrary to
the broker-dealer's recommendations.
    While these practices would not be per se prohibited by Regulation
Best Interest, we are also not saying that these practices are per se
consistent with Regulation Best Interest or other obligations under the
federal securities laws. Rather, these practices, which generally
involve conflicts of interest between the broker-dealer and the retail
customer, would be permissible under Regulation Best Interest only to
the extent that the broker-dealer satisfies the specific requirements
of Regulation Best Interest.
    While to satisfy proposed Regulation Best Interest, a broker-dealer
would not

be required to analyze all possible securities, other products or
investment strategies to find the single ``best'' security or
investment strategy for the retail customer, broker-dealers generally
should consider reasonably available alternatives offered by the
broker-dealer as part of having a reasonable basis for making the
recommendation, as required under the Care Obligation. Proposed
Regulation Best Interest also would not necessarily obligate a broker-
dealer to recommend the ``least expensive'' or the ``least
remunerative'' security or investment strategy, provided the broker-
dealer complies with the Disclosure, Care, and the Conflict of Interest
Obligations set forth in the relevant sections below.\104\
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    \104\ As noted, infra Section II.C.2, Regulation Best Interest
is intended to address concerns regarding the impact of material
conflicts of interest, and the level of care exercised, when broker-
dealers recommend a security or investment strategy involving
securities to retail customers. Accordingly, proposed Regulation
Best Interest applies only to recommendations, and the care
exercised in making a recommendation and addressing the conflicts
associated with a recommendation that may impact a broker-dealer's
recommendation of a security or investment strategy, but would not
apply to the execution of a recommended transaction or the potential
conflicts of interest associated with executing a recommended
transaction (e.g., payments for order flow), which as discussed
below are addressed by existing broker-dealer best execution, as
well as other regulatory obligations. Under the antifraud provisions
of the federal securities laws and SRO rules, broker-dealers have a
legal duty to seek to obtain best execution of customer orders. See
Regulation NMS, Exchange Act Release No. 51808 (June 9, 2005)
(``Regulation NMS Release''); FINRA Rule 5310 (Best Execution and
Interpositioning). A broker-dealer's duty of best execution requires
a broker-dealer to seek to execute customers' trades at the most
favorable terms reasonably available under the circumstances. See
Regulation NMS Release at 160. In addition, Exchange Act Rules 10b-
10, 606, and 607 require broker-dealers to disclose information
about payment-for-order-flow arrangements to customers at the
opening of a new account and, thereafter, on customer trade
confirmations and in public quarterly reports. Proposed Regulation
Best Interest would be separate from and would not alter these
obligations, which apply when a broker-dealer executes a
transaction, regardless of whether it was recommended. See infra
Section II.D.1.d.2.
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    As discussed in the Care Obligation below, we believe that the cost
(including fees, compensation and other financial incentives)
associated with a recommendation would generally be an important
factor. However, there are also other factors that a broker-dealer
should consider in determining whether a recommendation is in the best
interest of a retail customer, as required by the Care Obligation.
Other factors that would also be important to this determination
include, among others, the product's or strategy's investment
objectives, characteristics (including any special or unusual
features), liquidity, risks and potential benefits, volatility and
likely performance in a variety of market and economic conditions.\105\
While cost and financial incentives would generally be important, they
may be outweighed by these other factors. Accordingly, we preliminarily
believe that a broker-dealer would not satisfy its Care Obligation--and
hence Regulation Best Interest--by simply recommending the least
expensive or least remunerative security without any further analysis
of these other factors and the retail customer's investment profile.
---------------------------------------------------------------------------

    \105\ See discussion infra Section II.D.1.
---------------------------------------------------------------------------

    We preliminarily believe that, in order to meet its Care
Obligation, when a broker-dealer recommends a more expensive security
or investment strategy over another reasonably available alternative
offered by the broker-dealer, the broker-dealer would need to have a
reasonable basis to believe that the higher cost of the security or
strategy is justified (and thus nevertheless in the retail customer's
best interest) based on other factors (e.g., the product's or
strategy's investment objectives, characteristics (including any
special or unusual features), liquidity, risks and potential benefits,
volatility and likely performance in a variety of market and economic
conditions), in light of the retail customer's investment profile. When
a broker-dealer recommends a more remunerative security or investment
strategy over another reasonably available alternative offered by the
broker-dealer, the broker-dealer would need to have a reasonable basis
to believe that--putting aside the broker-dealer's financial
incentives--the recommendation was in the best interest of the retail
customer based on the factors noted above, in light of the retail
customer's investment profile. Nevertheless, this does not mean that a
broker-dealer could not recommend the more remunerative of two
reasonably available alternatives, if the broker-dealer determines the
products are otherwise both in the best interest of--and there is no
material difference between them from the perspective of--the retail
customer, in light of the retail customer's investment profile.
    We preliminarily believe that under the Care Obligation, a broker-
dealer could not have a reasonable basis to believe that a recommended
security is in the best interest of a retail customer if it is more
costly than a reasonably available alternative offered by the broker-
dealer and the characteristics of the securities are otherwise
identical, including any special or unusual features, liquidity, risks
and potential benefits, volatility and likely performance.\106\
Further, it would be inconsistent with the Care Obligation for the
broker-dealer to recommend the more expensive alternative for the
customer, even if the broker-dealer had disclosed that the product was
higher cost and had policies and procedures in place that were
reasonably designed to mitigate the conflict under the Conflict of
Interest Obligations, as the broker-dealer would not have complied with
its Care Obligation, as the higher cost of the security of would not be
justified by the security's other characteristics in comparison to
reasonably available alternatives (in contrast to the examples
discussed below). By treating cost associated with a recommendation as
an important factor in this analysis, the Care Obligation would enhance
a broker-dealer's existing suitability obligations under the federal
securities laws.
---------------------------------------------------------------------------

    \106\ An example of identical securities with different cost
structures are mutual funds with different share classes. The
Commission has historically charged broker-dealers with violating
Sections 17(a)(2) and (3) of the Securities Act for making
recommendations of more expensive mutual fund share classes while
omitting material facts. See, e.g., In re IFG Network Sec., Inc.,
Exchange Act Release No. 54127, at * 15 (July 11, 2006) (Commission
Decision) (registered representative violated Sections 17(a)(2) and
(3) by omitting to disclose to his customers material information
concerning his compensation and its effect upon returns that made
his recommendation that they purchase Class B shares misleading;
``The rate of return of an investment is important to a reasonable
investor. In the context of multiple-share-class mutual funds, in
which the only bases for the differences in rate of return between
classes are the cost structures of investments in the two classes,
information about this cost structure would accordingly be important
to a reasonable investor.'').
---------------------------------------------------------------------------

    We believe that a broker-dealer would violate proposed Regulation
Best Interest's Care Obligation and Conflict of Interest Obligations,
if any recommendation was predominantly motivated by the broker-
dealer's self-interest (e.g., self-enrichment, self-dealing, or self-
promotion), and not the customer's best interest--in other words,
putting aside the broker-dealer's self-interest, the recommendation is
not otherwise in the best interest of the retail customer based on
other factors, in light of the retail customer's investment profile,
and as compared to other reasonably available alternatives offered by
the broker-dealer. Examples would include making a recommendation to a
retail customer in order to: Maximize the broker-dealer's compensation
(e.g., commissions or other fees); further the broker-dealer's business
relationships; satisfy firm sales quotas or other targets; or win a
firm-

sponsored sales contest.\107\ We discuss possible methods of compliance
with the Care Obligation and mitigation requirement in Section II.D.
below.
---------------------------------------------------------------------------

    \107\ See infra note 321 and accompanying text.
---------------------------------------------------------------------------

    On the other hand, the best interest obligation would allow a
broker-dealer to recommend products that may entail higher costs or
risks for the retail customer, or that may result in greater
compensation to the broker-dealer than other products, or that may be
more expensive, provided that the broker-dealer complies with the
specific Disclosure, Care, and Conflict of Interest Obligations
described in Section II.D.
1. Consistency With Other Approaches
a. DOL Fiduciary Rule and Related PTEs
    We believe that the principles underlying our proposed best
interest obligation as discussed above, and the specific Disclosure,
Care, and Conflict of Interest Obligations described in more detail
below, generally draw from underlying principles similar to the
principles underlying the DOL's best interest standard, as described by
the DOL in the BIC Exemption.\108\ By choosing language that draws on
similar principles to the principles underlying the DOL's ``best
interest'' Impartial Conduct Standard, which would currently apply to
broker-dealers relying on the BIC Exemption and or any of the related
PTEs, we believe our proposed best interest standard would result in
efficiencies for broker-dealers that have already established
infrastructure to comply with the DOL best interest Impartial Conduct
Standard. As we believe that at its core, the Best Interest Obligation
is intended to achieve the same purpose as the best interest Impartial
Conduct Standard, we preliminarily believe broker-dealers would be able
to use the established infrastructure to meet any new obligations.
---------------------------------------------------------------------------

    \108\ The BIC Exemption's best interest Impartial Conduct
Standard would require (as here relevant) that advice be in a
retirement investor's best interest, and further defines advice to
be in the ``best interest'' if the person providing the advice acts
``with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in a like
capacity and familiar with the such matters would use . . . without
regard to the financial or other interests'' of the person. BIC
Exemption Release, 81 FR at 21007, 21027. BIC Exemption Section
II(c)(1); Section VIII(d).
---------------------------------------------------------------------------

    Under the DOL's standard, we understand that a recommendation could
not be based on a broker-dealer's own financial interest in the
transaction, nor could a broker-dealer recommend the investment unless
it meets the objective prudent person standard of care.\109\ As a
general example, the DOL explained that under this standard, an adviser
(such as a broker-dealer's registered representative), in choosing
between two investments, could not select an investment because it is
better for the adviser's bottom line even if it is a worse choice for
the investor.\110\
---------------------------------------------------------------------------

    \109\ Id.
    \110\ Id.
---------------------------------------------------------------------------

    Further, the proposed Disclosure Obligation, Care Obligation and
Conflict of Interest Obligations described in more detail below,
establish standards of professional conduct that, among other things,
would require the broker-dealer to employ reasonable care when making a
recommendation. According to the DOL, the BIC Exemption's best interest
standard incorporates ``objective standards of care and undivided
loyalty'' that would require adherence to a professional standard of
care in making investment recommendations that are in the investor's
best interest, and not basing recommendations on the advice-giver's own
financial interest in the transaction, nor recommending an investment
unless it meets the objective prudent person standard of care.\111\
---------------------------------------------------------------------------

    \111\ Id. at 21028.
---------------------------------------------------------------------------

    Like our proposed best interest obligation, we understand that the
DOL best interest standard as set forth in the BIC Exemption and in
related PTEs, among other things, does not: Prohibit a broker-dealer
from being paid, or receiving commissions or other transaction-based
payments; \112\ prohibit a broker-dealer from restricting
recommendations in whole or in part to proprietary products and/or
products that generate third-party payments \113\ or engaging in
``riskless principal transactions'' \114\ or certain transactions on a
principal basis; \115\ require the identification of the single
``best'' investment; \116\ nor impose an ongoing monitoring obligation,
so long as the conditions under the BIC exemption or other applicable
PTEs are satisfied.\117\
---------------------------------------------------------------------------

    \112\ See, e.g., BIC Exemption Release, 81 FR at 21032.
    \113\ We understand, however, that the BIC Exemption provides
that a broker-dealer that restricts recommendations, in whole or in
part, to proprietary products or investments that generate third-
party payments, may rely on the exemption provided (among other
conditions) the recommendation is prudent, the fees reasonable, the
conflicts disclosed (so that the customer can fairly be said to have
knowingly assented to the compensation arrangement), and the
conflicts are managed through stringent policies and procedures that
keep the focus on the customer's best interest, rather than any
competing financial interest. See BIC Exemption, Section IV; BIC
Exemption Release, 81 FR at 21029, 21052-57.
    \114\ The BIC Exemption provides exemptive relief (if all
applicable conditions are met) for compensation received as part of
riskless principal transactions, which are defined as ``a
transaction in which a Financial Institution, after having received
an order from a Retirement Investor to buy or sell an investment
product, purchases or sells the same investment product for the
Financial Institution's own account to offset the contemporaneous
transaction with the Retirement Investor.'' See BIC Exemption
Release, 81 FR at 21016, 21064. The DOL provided a separate
exemption for investment advice fiduciaries to engage in principal
transactions involving specified investments, but subject to
additional protective conditions. See Principal Transactions
Exemption.
    \115\ Separate from the BIC Exemption, the DOL granted a new
exemption for certain principal transactions, which permits ERISA
fiduciaries to sell or purchase certain debt securities and other
investments in principal transactions and riskless principal
transactions with plans and IRAs under certain conditions. See
Principal Transactions Exemption. Among other conditions, this
exemption requires adherence to Impartial Conduct Standards
identical to those in the BIC Exemption, including to provide advice
in the ``best interest'' as defined above, with the exception that
the Principal Transactions Exemption specifically refers to the
fiduciary's obligation to seek to obtain the best execution
reasonably available under the circumstances with respect to the
transaction, rather than to receive no more than ``reasonable
compensation.'' See id.
    \116\ BIC Exemption Release, 81 FR at 21029.
    \117\ Id.
---------------------------------------------------------------------------

    We understand that our proposed Regulation Best Interest does not
reflect the other Impartial Conduct Standards that the broker-dealer:
(1) Make no misleading statements; and (2) receive no more than
reasonable compensation. We are not proposing standards similar to
these Impartial Conduct Standards because existing broker-dealer
obligations under the federal securities laws and SRO rules already
prohibit misleading statements and require broker-dealers to receive
only fair and reasonable compensation. Specifically, the antifraud
provisions of the federal securities laws prohibit broker-dealers from
making misleading statements.\118\ In addition, FINRA rules address
broker-dealers' communications with the public and specifically require
broker-dealer communications to be based on principles of fair dealing
and good faith and to be fair and balanced.\119\ Furthermore, FINRA
rules generally require broker-dealer prices for securities and
compensation for services to be fair and reasonable taking into
consideration all relevant circumstances.\120\ For these reasons, we do
not believe that including these two components of the DOL's Impartial
Conduct Standards would add meaningful additional protections for
retail customers. In contrast to proposed

Regulation Best Interest, which would add enhancements to existing
broker-dealer obligations, we believe proposing new rules addressing
areas already covered by the federal securities laws and SRO rules--
without also enhancing those obligations--may cause confusion about how
these new obligations would differ from current requirements.
---------------------------------------------------------------------------

    \118\ See, e.g., Exchange Act Sections 10(b) and 15(c).
    \119\ See FINRA Rule 2210 (Communications with the Public).
    \120\ See, e.g., FINRA Rules 2121 (Fair Prices and Commissions),
2122 (Charges for Services Performed), and 2341 (Investment Company
Securities). See also Exchange Act Sections 10(b) and 15(c).
---------------------------------------------------------------------------

b. Recommendations of 913 Study
    Our proposed Regulation Best Interest diverges from the
recommendation of the 913 Study, in that it does not propose to
establish a uniform fiduciary standard of conduct for both investment
advisers and broker-dealers, but rather focuses on establishing a best
interest obligation for broker-dealers.\121\ The 913 Study recommended
that the Commission consider rulemakings that would apply expressly and
uniformly to both broker-dealers and investment advisers, when
providing personalized investment advice about securities to retail
customers, a fiduciary standard no less stringent than currently
applied to investment advisers under Advisers Act Sections 206(1) and
(2), which the staff interpreted ``to include at a minimum, the duties
of loyalty and care as interpreted and developed under Advisers Act
Section 206(1) and 206(2).'' Specifically, the 913 Study recommended
that the Commission should establish a uniform fiduciary standard of
conduct requiring broker-dealers and investment advisers, ``when
providing personalized investment advice about securities to retail
customers . . . to act in the best interest of the customer without
regard to the financial or other interest of the broker, dealer, or
investment adviser providing the advice.'' Further, the Study
recommended that the Commission engage in rulemaking and/or issue
interpretive guidance addressing the components of the uniform
fiduciary standard: The duties of loyalty (e.g., disclosure and
potentially prohibition and mitigation of certain conflicts) and care
(e.g., suitability).\122\
---------------------------------------------------------------------------

    \121\ We note that proposed Regulation Best Interest only
addresses issues related to the 913 Study's recommendations
regarding a standard of conduct for broker-dealers, and does not
involve unrelated recommendations of the 913 Study, notably, the
recommendations relating to harmonization of the legal frameworks
governing broker-dealers and investment advisers more generally. See
913 Study at 129 et seq. In a separate concurrent release, we
request comment on whether there should be certain potential
enhancements to investment advisers' legal obligations by looking to
areas where the current broker-dealer framework provides investor
protections that may not have counterparts in the investment adviser
context. See Fiduciary Duty Interpretive Release.
    \122\ See generally 913 Study at 110-23.
---------------------------------------------------------------------------

    We have given extensive consideration to the 913 Study
recommendation related to a uniform fiduciary standard of conduct, the
information that the public has submitted over the years following the
913 Study, and our extensive experience regulating broker-dealers and
investment advisers. Based on our evaluation, we have determined at
this time to propose a more tailored approach focusing on enhancements
to broker-dealer regulation to address our current concerns. We
preliminarily believe it makes more sense to build upon this regulatory
regime and the underlying expertise, and in this way reflect the unique
characteristics of the relationship (e.g., its transaction-based
nature, the variety of services the broker-dealer may provide, which
may or may not involve advice, and that the broker-dealer may provide
services in a principal or agent capacity), rather than to create a new
standard out of whole cloth or simply adopt obligations and duties that
have developed under a separate regulatory regime to address a
different type of advice relationship (e.g., a relationship that exists
primarily for the provision of advice about investments, and typically
involves portfolio management, often on a discretionary basis
\123\).\124\
---------------------------------------------------------------------------

    \123\ Many investment advisers manage portfolios for retail
investors and exercise investment discretion over the accounts,
while others provide advice to non-discretionary accounts, provide
financial planning, and sponsor or act as portfolio managers in wrap
fee programs. See, e.g., 913 Study.
    \124\ See discussion infra Section II.F.
---------------------------------------------------------------------------

    Nevertheless, the recommendations of the 913 Study were useful to
us in evaluating how to specifically enhance investor protection and
improve the obligations that apply to broker-dealers when making
recommendations to retail customers. While we are not proposing a
uniform fiduciary standard, as recommended in the 913 Study, we
nevertheless preliminarily believe that the proposed best interest
obligation draws from principles underlying and reflects the underlying
intent of many of the recommendations of the 913 Study. As a
consequence, we also believe the rule draws upon the duties of loyalty
and care as interpreted under Section 206(1) and (2) of Advisers Act,
even if not the same as the 913 Study recommendations or the duties
interpreted under the Advisers Act.\125\
---------------------------------------------------------------------------

    \125\ See Fiduciary Duty Interpretive Release.
---------------------------------------------------------------------------

    As discussed above, our proposed best interest obligation would
generally track key elements of both the language of Section 913 of the
Dodd-Frank Act and the 913 Study recommendation for the wording of a
uniform fiduciary standard (with the exception of the proposed
replacement of ``without regard to'' language), and would reflect the
principles underlying the 913 Study recommendations related to a
uniform fiduciary standard of conduct.
    Specifically, as noted, the 913 Study recommended that the
Commission engage in rulemaking and/or issue interpretive guidance
addressing the components of the uniform fiduciary standard: The duties
of loyalty (e.g., disclosure and potentially prohibition and mitigation
of certain conflicts) and care (e.g., suitability). As discussed in
more detail in the relevant sections below, in framing the recommended
duties of loyalty and care under the recommended uniform fiduciary
standard of conduct, the 913 Study looked to the duties of loyalty and
care under the Advisers Act as a baseline for the uniform fiduciary
standard--consistent with the ``no less stringent'' mandate of Section
913(g). For example, in framing the duty of loyalty under the
recommended uniform fiduciary standard of conduct, the 913 Study stated
that by reference to Advisers Act Section 206(1) and 206(2), the duty
of loyalty would require an investment adviser or broker-dealer ``to
eliminate, or provide full and fair disclosure about its material
conflicts of interest.'' \126\
---------------------------------------------------------------------------

    \126\ See 913 Study at 112-13.
---------------------------------------------------------------------------

    Further, taking into consideration the express provisions of
Section 913(g) of the Dodd-Frank Act, the 913 Study explains that the
recommended uniform standard would neither require the absolute
elimination of any particular conflicts (in the absence of another
requirement to do so) nor impose on broker-dealers a continuing duty of
loyalty or care; nor would the receipt of commissions or other standard
compensation, sale of proprietary products, or engaging in transactions
on a principal basis, in and of themselves, violate the fiduciary
standard.\127\ Similarly, in framing the duty of care under the
recommended uniform fiduciary standard of conduct, the 913 Study
considered the duty of care obligations interpreted under the Advisers
Act and current broker-dealer conduct obligations, in recommending that
the Commission consider specifying uniform, minimum standards for the
duty of care.\128\ The 913 Study noted that the Commission could
articulate such minimum standards by referring to and expanding upon,
as appropriate, the explicit minimum standards of conduct relating to
the duty

of care applicable to broker-dealers (e.g., suitability), and could
also take into account Advisers Act principles related to the duty of
care (e.g., duty to provide suitable investment advice).\129\
---------------------------------------------------------------------------

    \127\ See 913 Study at 113.
    \128\ See 913 Study at 120-21.
    \129\ See 913 Study at 121.
---------------------------------------------------------------------------

    We believe the proposed best interest obligation reflects many of
these same principles of what would be required or prohibited under the
uniform standard recommended by the 913 Study, as discussed above. In
addition, as discussed in Section II.D, consistent with the 913 Study
recommendation, to satisfy our proposed best interest obligation, we
are proposing that broker-dealers must comply with specific
requirements: Namely, the Disclosure, Care and Conflict of Interest
Obligations. This specificity is intended to both: (1) Provide clarity
to broker-dealers about their obligations under Regulation Best
Interest generally and how they relate to existing obligations when
making recommendations (i.e., suitability); and (2) particularly
address the material conflicts of interest resulting from financial
incentives. As we discuss in more detail in the relevant sections
specifically addressing these obligations, we believe the Disclosure,
Care and Conflict of Interest Obligations generally draw from
principles underlying the duties of care and loyalty as recommended in
the 913 Study,\130\ while having the specific regulatory obligations
reflect the unique structure and characteristics of broker-dealer
relationships with retail customers.
---------------------------------------------------------------------------

    \130\ See infra discussion in Section II.D.1 and 2 comparing the
Care and Conflict recommendations of the 913 Study.
---------------------------------------------------------------------------

2. Request for Comment on the Best Interest Obligation
    The Commission requests comment on defining the proposed best
interest obligation to require broker-dealers ``to act in the best
interest of the retail customer . . . without placing the financial or
other interest of the [broker-dealer] making the recommendation ahead
of the interest of the retail customer,'' as well as comment on the
application of this standard and the types of practices that would be
consistent or inconsistent with this standard.
     Do commenters believe that we should adopt a best interest
obligation for broker-dealers?
     Do commenters agree with the general approach of the best
interest obligation of building on existing requirements? Are there
alternative approaches or additional steps that the Commission should
take? If so, what?
     Would the Best Interest Obligation cause a broker-dealer
to act in a manner that is consistent with what a retail customer would
reasonably expect from someone who is required to act in their best
interest? If so, how? If not, what further steps should the Commission
take? Why or why not?
     Does the obligation enhance retail customer protection? If
so, how? If not, what further steps should the Commission take? Why or
why not?
     Do commenters agree with our assessment of how the Best
Interest Obligation compares with the DOL's best interest Impartial
Conduct Standard, as incorporated in the BIC Exemption? Do commenters
believe that proposed Regulation Best Interest provides similar
protections to the DOL's best interest Impartial Conduct Standard, as
incorporated in the BIC Exemption? If not, what are the differences and
what impact would those differences have on retail customers? Do
commenters believe it would be desirable to maintain consistency with
the DOL requirements and guidance in this area, as set forth in the BIC
exemption?
     As discussed herein, we propose that the best interest
obligation would require a broker-dealer, when making a recommendation,
not to put the interests of a broker-dealer or its associated persons
ahead of the retail customer's interest. Does this formulation meet the
Commission's goal of protecting retail customers and clarifying the
standards that apply when broker-dealers are providing advice?
     It is our intent that our proposal would make it clear
that, insofar as existing broker-dealer obligations have been
interpreted to stand for the principle that broker-dealers may put
their own interests ahead of their retail customers' when making a
recommendation, those interpretations would be inconsistent with
Regulation Best Interest. Does the rule text achieve this objective? To
the extent that it does not, or it does not do so with appropriate
clarity and certainty, what changes could be made to the proposed rule?
Should we provide a clarifying note?
     To best capture this obligation, we are proposing that a
broker-dealer must act in the best interest of the retail customer
``without placing the financial or other interest of the [broker-
dealer] making the recommendation ahead of the interest of the retail
customer.'' Do commenters agree with our proposed approach, or should
the Commission take an alternative approach, such as provide that to
act in the best interest, a broker-dealer must act in the best interest
of the retail customer ``without regard to the financial or other
interest of the [broker-dealer] making the recommendation'' or ``by
placing the interest of the retail customer ahead of the broker-
dealer''? Why or why not? What practical impact would the inclusion or
exclusion of the Commission's proposed approach or the potential
alternative approach have on the obligations of the proposed best
interest obligation as described? Will it lead to retail customer
confusion? Would courts interpret the standard differently? Is there
different language that the Commission should consider?
     Should the Commission provide further guidance on the
proposed best interest obligation? Should the guidance be with respect
to particular transactions or relationships? If so, please provide
examples of scenarios that should be deemed to meet or not meet this
standard.
     Are the guidance and interpretations provided by the
Commission appropriate? Should any of it be included in the rule text?
Please be specific.
     Should the Commission define the term ``best interest'' in
the rule text? Should the Commission define ``best interest'' with
respect to particular transactions or relationships? If so, what
definitions should the Commission consider and why? What are the
advantages and disadvantages of any proposed alternatives in this
context? Please explain with specificity what duties any suggested
definitions would entail.
     Do commenters agree with the Commission's guidance on what
practices should not be per se prohibited by Regulation Best Interest
(provided the terms of the proposed rule are satisfied)? Why or why
not? Should any of these practices be per se prohibited? Why or why
not?
     Do commenters agree with our view that recommending a more
expensive or more remunerative alternative for identical securities
would be inconsistent with Regulation Best Interest? Are there any
additional practices that the Commission should specifically identify
as consistent or inconsistent with Regulation Best Interest? Please
identify any such practices and why they should be viewed as consistent
or inconsistent with this obligation.
     Are any changes in Regulation Best Interest necessary to
make it clear that broker-dealers who offered a limited scope of
products nevertheless can satisfy the standard?
     Do commenters believe that proposed Regulation Best
Interest would result in broker-dealers limiting access to or
eliminating certain products in a

manner that could, in and of itself, cause harm to certain retail
customers for whom those products are consistent with their investment
objectives and in their best interest? If so, what products do
commenters think would be limited or eliminated? Would any changes in
Regulation Best Interest minimize or avoid these outcomes?
     Do commenters believe that our proposed rule is
sufficiently clear that a broker-dealer is not required to monitor a
retail customer's account as part of its obligations unless
specifically contracted for? If not, what modifications should be made
to Regulation Best Interest? Do commenters believe that retail
customers understand that a broker-dealer is not required to monitor
retail customers' accounts? If so, what is the basis for that
understanding (e.g., firm disclosures)? What specific obligations do
broker-dealers typically take on if they contract to monitor customer
accounts?
     Should Regulation Best Interest apply when broker-dealers
agree to provide ongoing monitoring of the retail customer's investment
for purposes of recommending changes in investments? Why or why not?
Alternatively, should broker-dealers who provide ongoing monitoring be
considered investment advisers?
     Do commenters agree with the Commission's assessment that
no new private right of action or right of rescission is created by
Regulation Best Interest?
     Despite the Commission's assertion that Regulation Best
Interest is limited to broker-dealers and is not intended to impact the
fiduciary obligations under the Advisers Act, do commenters have
concerns regarding the potential impact of this best interest
obligation on the legal obligations under other standards? If so, what
are these concerns? Do commenters have any suggestions on how to
provide further clarification on this issue?
     In defining a broker-dealer's obligation when making a
recommendation to a retail customer, the Commission is not proposing to
impose additional requirements, such as requirements related to the
receipt of fair and reasonable compensation or the prohibition against
misleading statements that are part of DOL's Impartial Conduct
Standards, because broker-dealers already have these obligations.
Should the Commission consider incorporating these or other
requirements into the proposed rule? If so, what requirements should be
added and why? How should those requirements be defined? How would the
suggested requirements be different from current broker-dealer
obligations and enhance investor protection? To the extent broker-
dealers already have existing obligations related to suggested
additional requirements, should the Commission consider modifying the
existing broker-dealer regulatory obligations, and if so, how?
     Do commenters agree with our proposed approach of a
tailored standard for broker-dealers as opposed to a uniform standard
of conduct for both broker-dealers and investment advisers?
     Do commenters believe that we should explicitly adopt
FINRA's suitability standard, and then add any desired changed or
enhancements to that standard, in order to simplify the best interest
obligation? Are there specific benefits or problems with that approach?

C. Key Terms and Scope of Best Interest Obligation

1. Natural Person Who Is an Associated Person
    The Commission proposes to define ``natural person who is an
associated person'' as a natural person who is an associated person as
defined under Section 3(a)(18) of the Exchange Act: ``any partner,
officer, director or branch manager of such broker or dealer (or any
person occupying a similar status or performing similar functions), any
person directly or indirectly controlling, controlled by, or under
common control with such broker or dealer, or any employee of such
broker or dealer, except that any person associated with a broker or
dealer whose functions are solely clerical or ministerial shall not be
included in the meaning of such term for purposes of section 15(b) of
this title (other than paragraph 6 thereof).''
    In defining in this manner, we intend to require not only the
broker-dealer entity, but also individuals that are associated persons
of a broker-dealer (e.g., registered representatives) to comply with
specified components of Regulation Best Interest when making
recommendations, as described below. We have limited the definition
only to a ``natural person who is an associated person'' to avoid the
application of Regulation Best Interest to ``all associated persons of
a broker-dealer,'' as the latter definition would capture affiliated
entities of the broker-dealer and would extend the application of
Regulation Best Interest to entities that are not themselves broker-
dealers, which are not our intended focus.
2. When Making a Recommendation, at Time Recommendation Is Made
    The Commission proposes that Regulation Best Interest would apply
when a broker-dealer is making a recommendation about any securities
transaction or investment strategy to a retail customer (as defined and
discussed below). We believe that by applying Regulation Best Interest
to a ``recommendation,'' as that term is currently interpreted under
broker-dealer regulation, we would provide clarity to broker-dealers
and their retail customers as to when Regulation Best Interest applies
and maintain efficiencies for broker-dealers that have already
established infrastructures to comply with suitability obligations.
Moreover, we believe that taking an approach that is driven by each
recommendation would appropriately capture and reflect the various
types of advice broker-dealers provide to retail customers, whether on
an episodic, periodic, or more frequent basis and help ensure that
customers receive the protections that Regulation Best Interest is
intended to provide.
    The proposed rule relies in part on the statutory authority
provided in Section 913(f) of the Dodd-Frank Act, which provides the
Commission rulemaking authority to address the standards of care ``for
providing personalized investment advice about securities to such
retail customers.'' \131\ As noted in the 913 Study, Section 913 of the
Dodd-Frank Act does not define ``personalized investment advice,'' and
the broker-dealer regulatory regime does not use the term ``investment
advice'' but instead focuses on whether a broker-dealer has made a
``recommendation.'' \132\ The 913 Study recommended that the definition
of ``personalized investment advice'' should at a minimum encompass the
making of a ``recommendation'' as developed under applicable broker-
dealer regulation.\133\ Given that proposed Regulation Best Interest is
focused on broker-dealer standards of conduct, and recognizing that the
term ``personalized investment advice'' is not used in the broker-
dealer regulatory regime, we propose that, consistent with

broker-dealer regulation and in recognition of the 913 Study
recommendation, proposed Regulation Best Interest would apply to a
``recommendation,'' as discussed below.\134\
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    \131\ See Section 913(f) of the Dodd-Frank Act.
    \132\ See 913 Study at 123-24.
    \133\ Id. at 127. The 913 Study also indicated that beyond that,
``the term also could include any other actions or communications
that would be considered investment advice about securities under
the Advisers Act (such as comparisons of securities or asset
allocation strategies), except for `impersonal investment advice' as
developed under the Advisers Act.'' Id. (emphasis in original). As
noted below, we are seeking comment on alternative definitions and
the scope of the term ``recommendation.''
    \134\ See ICI August 2017 Letter (``We note that because we are
suggesting a distinct best interest standard of conduct for broker-
dealers, and that the FINRA definition of `recommendation' should
apply, the term `personalized investment advice,' which the SEC used
in its 2013 request for data, would not be applicable, as that term
was intended to encompass both `recommendations' under the FINRA
rules and `investment advice' under the Advisers Act.'').
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a. Scope of Recommendation
    The Commission believes that the determination of whether a
recommendation has been made to a retail customer that triggers the
best interest obligation should be interpreted consistent with existing
broker-dealer regulation under the federal securities laws and SRO
rules, which would provide clarity to broker-dealers and maintain
efficiencies for broker-dealers with established infrastructures that
already rely on this term.\135\ In addition, the Commission believes
that whether a recommendation has been made should, also consistent
with existing broker-dealer regulation, turn on the facts and
circumstances of the particular situation, and therefore, whether a
recommendation has taken place is not susceptible to a bright line
definition.\136\ We believe that the meaning of the term
``recommendation'' is well-established and familiar to broker-dealers,
and we believe that the same meaning should be ascribed to the term in
this context. We are concerned that even providing a principles-based
definition, which draws upon the principles underlying existing
Commission precedent and guidance, may create unnecessary confusion as
to whether the language intentionally or unintentionally diverges from
existing precedent. As we are not proposing to make any changes to this
existing precedent and guidance regarding when a recommendation is
made, we preliminarily believe that it is not necessary or appropriate
to define it for purposes of the proposed rule.
---------------------------------------------------------------------------

    \135\ See, e.g., FINRA Regulatory Notice 12-25 at Q2 and Q3
(regarding the scope of ``recommendation''); see also Michael F.
Siegel, Exchange Act Release No. 58737, at *21-27 (Oct. 6, 2008)
(Commission opinion, sustaining NASD findings) (applying FINRA's
guiding principles to determine that a recommendation was made),
aff'd in relevant part, Siegel v. SEC, 592 F.3d 147 (D.C. Cir.
2010), cert. denied, 560 U.S. 926 (2010); In re Application of Paul
C. Kettler, Exchange Act Release No. 31354 at 5, n.11 (Oct. 26,
1992). Some commenters agreed that the Commission should use FINRA's
definition and guidance of recommendation in establishing a standard
of conduct for broker-dealers. See AFL-CIO Letter (``Because DOL
relied on FINRA guidance with regard to what constitutes a
recommendation, the SEC could simply adopt that same definition for
its own rulemaking purposes''); Letter from Barbara Roper, Director
of Investor Protection, Consumer Federation of America (Sept. 14,
2017) (``CFA'') (``While the determination of whether a
recommendation has been made will always be based on the particular
facts and circumstances, FINRA guidelines provide a sound basis for
such a definition.''). See also Business Conduct Standards Adopting
Release.
    \136\ This approach to whether a ``recommendation'' has occurred
is consistent with the approach the Commission has taken in other
contexts. See Business Conduct Standards Adopting Release at 156.
---------------------------------------------------------------------------

    In determining whether a broker-dealer has made a recommendation,
factors that have historically been considered in the context of
broker-dealer suitability obligations include whether the communication
``reasonably could be viewed as a `call to action' '' and ``reasonably
would influence an investor to trade a particular security or group of
securities.'' \137\ The more individually tailored the communication to
a specific customer or a targeted group of customers about a security
or group of securities, the greater the likelihood that the
communication may be viewed as a ``recommendation.''
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    \137\ See FINRA Notice to Members 01-23, Online Suitability
(Mar. 19, 2001), and Notice of Filing of Proposed Rule Change to
Adopt FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability)
in the Consolidated FINRA Rulebook, Exchange Act Release No. 62718
(Aug. 13, 2010), 75 FR 51310 (Aug. 19, 2010), as amended, Exchange
Act Release No. 62718A (Aug. 20, 2010), 75 FR 52562 (Aug. 26, 2010)
(discussing what it means to make a ``recommendation''); FINRA
Regulatory Notice 11-02, Know Your Customer and Suitability (Jan.
2011) (discussing how to determine the existence of a
recommendation), and FINRA Regulatory Notice 12-25 at n.24 (citing
FINRA Regulatory Notices discussing principles on determining
whether a communication is a ``recommendation''). See also Michael
F. Siegel, Exchange Act Release No. 58737, at *11 (Oct. 6, 2008)
(Commission opinion, sustaining NASD findings) (applying FINRA
principles to facts of case to find a recommendation), aff'd in
relevant part, Siegel v. SEC, 592 F.3d 147 (D.C. Cir. 2010), cert.
denied, 560 U.S. 926 (2010).
    The DOL Fiduciary Rule follows a consistent approach in defining
a ``recommendation'' as a ``communication that, based on its
content, context, and presentation, would reasonably be viewed as a
suggestion that the [advice] recipient engage in or refrain from
taking a particular course of action.'' See DOL Fiduciary Rule
Release, 81 FR 20945, 20972 (``The Department, however, as described
both here and elsewhere in the preamble, has taken an approach to
defining ``recommendation'' that is consistent with and based on
FINRA's approach''); U.S. Department of Labor, Employee Benefits
Security Administration, Conflict of Interest FAQs, Part II--Rule
(Jan. 2017) Q1 (discussing what types of communication constitute a
``recommendation''), available at https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/coi-rules-and-exemptions-part-2.pdf (``DOL FAQs Part II'').
    We understand concerns have been expressed that the DOL
Fiduciary Rule covers a broader range of communications as
``fiduciary investment advice.'' We are mindful of such concerns and
therefore, propose to interpret what is a recommendation consistent
with existing guidance under the federal securities laws and SRO
rules. See, e.g., Letter from Lisa Bleier, Managing Director &
Associate General Counsel, SIFMA in response to DOL's Request for
Information Regarding the Fiduciary Rule and Prohibited Transaction
Exemptions (Aug. 9, 2017); Letter from Lisa Bleier, Managing
Director & Associate General Counsel, SIFMA, in response to RIN
1210-AB79; Proposed Delay and Reconsideration of DOL Regulation
Redefining the Term ``Fiduciary'' (Apr. 17, 2017) (expressing
concerns regarding the breadth of what is considered fiduciary
investment advice under the DOL Fiduciary Rulemaking and advocating
for an approach that ``would build upon, and fit seamlessly within,
the existing and long-standing securities regulatory regime for
broker-dealers'').
---------------------------------------------------------------------------

    Consistent with existing broker-dealer suitability obligations,
certain communications under this approach would generally be excluded
from the meaning of ``recommendation'' as long as they do not include
(standing alone or in combination with other communications), a
recommendation of a particular security or securities. For example, as
recognized under existing broker-dealer regulation, excluded
communications would include providing general investor education
(e.g., a brochure discussing asset allocation strategies) or limited
investment analysis tools (e.g., a retirement savings calculator).\138\
---------------------------------------------------------------------------

    \138\ See FINRA Rule 2111.03 (excluding the following
communications from the coverage of Rule 2111 as long as they do not
include (standing alone or in combination with other communications)
a recommendation of a particular security or securities: (a) General
financial and investment information, including (i) basic investment
concepts, such as risk and return, diversification, dollar cost
averaging, compounded return, and tax deferred investment, (ii)
historic differences in the return of asset classes (e.g., equities,
bonds, or cash) based on standard market indices, (iii) effects of
inflation, (iv) estimates of future retirement income needs, and (v)
an assessment of a customer's investment profile; (b) Descriptive
information about an employer-sponsored retirement or benefit plan,
participation in the plan, the benefits of plan participation, and
the investment options available under the plan; (c) Asset
allocation models that are (i) based on generally accepted
investment theory, (ii) accompanied by disclosures of all material
facts and assumptions that may affect a reasonable investor's
assessment of the asset allocation model or any report generated by
such model, and (iii) in compliance with Rule 2214 (Requirements for
the Use of Investment Analysis Tools) if the asset allocation model
is an ``investment analysis tool'' covered by Rule 2214; and (d)
Interactive investment materials that incorporate the above. The DOL
takes a similar approach, excluding from the term
``recommendation,'' among other things, general communications and
investment education (including plan information, general financial,
investment and retirement information, asset allocation models and
interactive investment materials). See 29 CFR 2510.3-21(b); DOL
Fiduciary Rule Release, 81 FR 20945, 20971; DOL FAQs Part II;
Definition of Recommendation.
---------------------------------------------------------------------------

    Consistent with existing interpretations and guidance of what
constitutes a recommendation, the obligation would apply to activity
that has been interpreted as ``implicit

recommendations.'' \139\ For example, certain transactions that a
broker-dealer executes on a retail customer's behalf, even if not
separately authorized, have been interpreted as implicit
recommendations that can trigger suitability obligations.\140\ We
propose that, consistent with existing interpretations and guidance of
what constitutes a recommendation, as well as Exchange Act and SRO
rules addressing broker-dealer regulation of discretionary
accounts,\141\ the obligation to act in the customer's best interest
should apply consistently to any recommendation, whether through the
execution of discretionary transactions (considered to be implicitly
recommended) or when making a recommendation to a brokerage customer in
a non-discretionary account.\142\
---------------------------------------------------------------------------

    \139\ See, e.g., FINRA Regulatory Notice 12-25 at Q3 (regarding
the scope of ``implicit recommendation''); see also infra Section
II. F for further discussion.
    \140\ See, e.g., Rafael Pinchas, 54 SEC. 331, 341 n.22, 1999 SEC
LEXIS 1754, at *20 n.22 (1999) (``Transactions that were not
specifically authorized by a client but were executed on the
client's behalf are considered to have been implicitly recommended
within the meaning of [FINRA's suitability rule].'').
    \141\ The Exchange Act addresses manipulative, deceptive, or
fraudulent practices with respect to discretionary accounts. See
Exchange Act Rule 15c1-7 (Discretionary Accounts); Exchange Act
Section 3(a)(35) (defining when a person exercises ``investment
discretion'' with respect to an account). See also NASD Rule 2510
(Discretionary Accounts) and Incorporated NYSE Rule 408
(Discretionary Power in Customers' Accounts). These rules address
the obligations that apply to members that have discretionary power
over a customer's account, such as the requirement to obtain
customer authorization prior to exercising discretion and to conduct
supervisory reviews of discretionary accounts. FINRA has adopted
additional rules governing discretionary account requirements for
specific products and scenarios. See, e.g., FINRA Rule 5121 (Public
Offerings of Securities With Conflicts of Interest) (subpart (c)
relating to discretionary accounts); FINRA Rule 4512 (Customer
Account Information) (subpart (a)(3) relating to discretionary
accounts). These rules are in addition to rules, such as FINRA Rule
2111, that apply to any recommendation. See also Section II.F. for a
discussion and request for comment regarding broker-dealer exercise
of discretion and the extent to which such exercise is ``solely
incidental'' to the conduct of its business as a broker-dealer.
    \142\ See, e.g., Paul C. Kettler, 51 SEC. 30, 32 n.11, 1992 SEC
LEXIS 2750, at *5 n.11 (1992) (stating that transactions a broker
effects for a discretionary account are implicitly recommended). A
number of commenters focused on addressing the standard that applied
to ``non-discretionary'' recommendations. See, e.g., SIFMA 2017
Letter (noting that ``BDs, on the other hand, provide non-
discretionary recommendations. BDs generally cannot trade on their
client's behalf; clients must authorize any transactions'' and
suggesting that the definition of the term ``recommendation'' be
limited to ``non-discretionary recommendations''); T. Rowe Letter
(``Given the history, we believe that the SEC's best path forward
would be to focus specifically on updating the standard applicable
to non-discretionary broker-dealer recommendations, irrespective of
account type.''). But see Letter from Ronald P. Bernardi, President
and Chief Executive officer, Bernardi Securities, Inc. (Sept. 11,
2017) (``Bernardi Letter'') (suggesting consideration of a ``Best
Interest Standard'' that ``would apply to all non-discretionary
(self-directed) and discretionary transaction-based, broker-dealer
relationships.''). See also infra Section II.F.
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b. Duration of Obligation and Effect of Contractual Arrangements/Course
of Dealing
    Regulation Best Interest would be triggered ``when making'' a
recommendation and a broker-dealer would be required to act in the best
interest ``at the time the recommendation is made.'' The proposed rule
is intended to focus the obligation to each particular instance when a
recommendation is made to a retail customer and whether the broker-
dealer satisfied its best interest obligation (i.e., was in compliance
with the specific Disclosure, Care, and Conflict of Interest
Obligations) at the time of the recommendation. The proposed rule is
not intended to change the varied advice relationships that currently
exist between a broker-dealer and its retail customers, ranging from
one-time, episodic or more frequent advice,\143\ consistent with the
goal of enhancing investor protection while preserving retail customer
access to and choice in advice relationships.
---------------------------------------------------------------------------

    \143\ To that end, the intent of the proposed rule is to impose
a best interest obligation on a broker-dealer when engaging in a
very specific activity--the making of a recommendation to a retail
customer (as defined below)--and to define the contours of that
obligation. The rule is not intended to supersede the body of case
law holding that broker-dealers that exercise discretion or control
over customer assets, or have a relationship of trust and confidence
with their customers, owe customers a fiduciary duty, or the scope
of obligations that attach by virtue of that duty. See, e.g., U.S.
v. Skelly, 442 F.3d 94, 98 (2d Cir. 2006) (fiduciary duty found
``most commonly'' where ``a broker has discretionary authority over
the customer's account''); United States v. Szur, 289 F.3d 200, 211
(2d Cir. 2002) (``Although it is true that there `is no general
fiduciary duty inherent in an ordinary broker/customer
relationship,' a relationship of trust and confidence does exist
between a broker and a customer with respect to those matters that
have been entrusted to the broker.'') (citations omitted); Leib v.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F. Supp. 951, 953-
954 (E.D. Mich. 1978), aff'd, 647 F.2d 165 (6th Cir. 1981)
(recognizing that a broker who has de facto control over non-
discretionary account generally owes customer duties of a fiduciary
nature; looking to customer's sophistication, and the degree of
trust and confidence in the relationship, among other things, to
determine duties owed); Arleen W. Hughes, Exchange Act Release No.
4048 (Feb. 18, 1948) (Commission Opinion), aff'd sub nom. Hughes v.
SEC, 174 F.2d 969 (D.C. Cir. 1949) (``Release 4048'') (noting that
fiduciary requirements generally are not imposed upon broker-dealers
who render investment advice as an incident to their brokerage
unless they have placed themselves in a position of trust and
confidence, and finding that Hughes was in a relationship of trust
and confidence with her clients). Such broker-dealers would continue
to have such fiduciary duties, subject to liability under the
antifraud provisions of the federal securities laws, in addition to
the express requirements of the proposed rule.
    See also infra Section II.F. for a discussion and request for
comment regarding broker-dealer exercise of discretion and the
extent to which such exercise is ``solely incidental'' to the
conduct of its business as a broker-dealer.
---------------------------------------------------------------------------

    Accordingly, the best interest obligation would not, for example:
(1) Extend beyond a particular recommendation or generally require a
broker-dealer to have a continuous duty to a retail customer or impose
a duty to monitor the performance of the account;\144\ (2) require the
broker-dealer to refuse to accept a customer's order that is contrary
to a broker-dealer's recommendations; or (3) apply to self-directed or
otherwise unsolicited transactions by a retail customer, who may also
receive other recommendations from the broker-dealer.\145\
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    \144\ Regulation Best Interest would not alter or diminish
broker-dealers' current supervisory obligations under the Exchange
Act and detailed SRO rules, including the establishment of policies
and procedures reasonably designed to prevent and detect violations
of, and to achieve compliance with, the federal securities laws and
regulations, as well as applicable SRO rules. See Exchange Act
Section 15(b)(4)(E); FINRA Rule 3110.
    \145\ Under existing broker-dealer regulatory obligations,
broker-dealers have an obligation to accurately record all
recommended transactions as ``solicited.'' See Exchange Act Rule
17a-3(a)(6)-(7); Exchange Act Rule 17a-25(a)(2). We are not
proposing any changes to these compliance requirements.
---------------------------------------------------------------------------

    We recognize, however, that a broker-dealer may agree with a retail
customer by contract to take on additional obligations beyond those
imposed by Regulation Best Interest, for example, by agreeing with a
retail customer to hold itself to fiduciary duties, or to provide
periodic or ongoing services (such as ongoing monitoring of the retail
customer's investments for purposes of recommending changes in
investments).\146\ To the extent that the broker-dealer takes on such
obligations, Regulation Best Interest would apply to, and a broker-
dealer would be liable for not complying with the proposed rule with
respect to, any recommendations about securities or investment
strategies made to retail customers resulting from such services.
However, the best interest obligation does not impose new obligations
with respect to the additional services, provided that they do not
involve a recommendation to retail customers. Importantly, as noted
above, Regulation Best Interest would not alter a broker-dealer's
existing obligations under the Exchange Act or any other applicable
provisions of the

federal securities laws and rules and regulations.\147\
---------------------------------------------------------------------------

    \146\ See infra Section II.D.1.
    \147\ See supra Section I.B (discussing a broker-dealer's
existing obligations, including fiduciary obligations).
---------------------------------------------------------------------------

    In addition, under Section 29(a) of the Exchange Act, a broker-
dealer would not be able to waive compliance with the rule's obligation
to act in the best interest of the retail customer at the time a
recommendation is made and the specific obligations thereunder, nor can
a retail customer agree to waive her protection under Regulation Best
Interest. Thus, the scope of Regulation Best Interest cannot be reduced
by contract.
    Furthermore, in addition to furthering our goal of enhancing
investor protection while preserving retail customer access to and
choice of advice relationships, we believe that applying the best
interest obligation to when a broker-dealer is making a recommendation
generally would be consistent with the DOL's approach under the DOL
Fiduciary Rule and the BIC Exemption. The DOL states that the BIC
Exemption ``does not mandate an ongoing or long-term advisory
relationship, but rather leaves the duration of the relationship to the
parties.'' \148\ Consistent with the DOL's interpretation of a
fiduciary's monitoring responsibility in the preamble to the DOL
Fiduciary Rule,\149\ the BIC Exemption requires broker-dealers, among
others, to disclose whether or not they will monitor an investor's
investments and alert the investor to any recommended changes to those
investments and, if so, the frequency with which the monitoring will
occur and the reasons for which the investor will be alerted.\150\ The
DOL does not require broker-dealers to provide advice on an ongoing,
rather than transactional, basis.\151\ Specifically, ``[t]he terms of
the contract or disclosure along with other representations,
agreements, or understandings between the Adviser, Financial
Institution and Retirement Investor, will govern whether the nature of
the relationship between the parties is ongoing or not.'' \152\
---------------------------------------------------------------------------

    \148\ BIC Exemption Release, 81 FR at 21032. See also DOL
Fiduciary Rule Release, 81 FR at 20987 (``[T]he final rule does not
impose on the person an automatic fiduciary obligation to continue
to monitor the investment or the advice recipient's activities to
ensure the recommendations remain prudent and appropriate for the
plan or IRA. Instead, the obligation to monitor the investment on an
ongoing basis would be a function of the reasonable expectations,
understandings, arrangements, or agreements of the parties'').
    \149\ Id.
    \150\ Id. at 21032.
    \151\ Id.
    \152\ Id.
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3. Any Securities Transaction or Investment Strategy
    The Commission proposes to apply Regulation Best Interest to
recommendations of any securities transaction (sale, purchase, and
exchange) \153\ and investment strategy (including explicit
recommendations to hold a security or regarding the manner in which it
is to be purchased or sold) to retail customers.\154\ Securities
transactions may also include recommendations to roll over or transfer
assets from one type of account to another, such as recommendations to
roll over or transfer assets in an ERISA account to an IRA.\155\
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    \153\ This approach is consistent with existing broker-dealer
suitability obligations. Regulation Best Interest applies only to
recommendations, and not to the execution of a recommended
transaction, which as discussed below is addressed by existing
broker-dealer best execution obligations. See, e.g., FINRA Rule 5310
(Best Execution and Interpositioning). Regulation Best Interest is
separate from and does not alter these obligations. See generally
infra Section II.D.2, for discussion of a broker-dealer's best
execution obligations.
    \154\ FINRA interprets what is an investment strategy broadly.
Examples of investment strategies are recommendations to purchase
the ``Dogs of the Dow,'' securities on margin, liquify home
mortgages, or explicit recommendations to hold securities. See FINRA
Regulatory Notice 12-25 at Q7. Similarly, under antifraud case law,
a recommendation can also encompass the manner for purchasing or
selling the security. A recommendation to purchase on margin, if
unsuitable, may violate antifraud provisions of the Exchange Act in
the absence of disclosure. See Troyer v. Karcagi, 476 F. Supp. 1142,
1152 (S.D.N.Y. 1979) (opening an unsuitable margin account, without
disclosure of the unsuitability to the customer, renders a broker-
dealer primarily liable under section 10(b) and Rule 10b-5 if it
acts with scienter); Steven E. Muth and Richard J. Rouse, Exchange
Act Release No. 52551, at *19, 58 SEC. 770, 797 (Oct. 3, 2005)
(Commission opinion) (finding registered representative's
recommendations of risky margin purchases to customers who had
relatively modest financial profiles and conservative investment
objectives, where he also misled customers regarding adverse impact
of margin trading, were unsuitable). See also William J. Murphy and
Carl M. Birkelbach, Exchange Act Release No. 69923, at *17 (July 2,
2013) (Commission opinion, sustaining FINRA findings) (``The large
margin debit balance in Lowry's account exacerbated the
unsuitability of Murphy's already risky trading.'').
    \155\ A recommendation concerning the type of retirement account
in which a customer should hold his retirement investments typically
involves a recommended securities transaction, and thus is subject
to FINRA suitability obligations. For example, a firm may recommend
that an investor sell his plan assets and roll over the cash
proceeds into an IRA. Recommendations to sell securities in the plan
or to purchase securities for a newly- opened IRA are subject to
FINRA suitability obligations. See FINRA Regulatory Notice 13-45. As
previously noted, recommendations of unsuitable transactions may
also violate the antifraud provisions of Securities Act Section
17(a); Exchange Act Section 10(b) and Rule 10b-5 thereunder.
---------------------------------------------------------------------------

    We are not proposing at this time that the duty extend to
recommendations of account types generally, unless the recommendation
is tied to a securities transaction (e.g., to roll over or transfer
assets such as IRA rollovers). Evaluating the appropriateness of an
account is an issue that implicates both broker-dealers and investment
advisers that are making recommendations of a brokerage account or an
advisory account. Accordingly, we are requesting comment below about
the obligations that apply to both broker-dealers and investment
advisers relating to recommendations of accounts generally, and whether
and how we should address those obligations.
4. Retail Customer
    The Commission proposes to define ``retail customer'' as: ``a
person, or the legal representative of such person, who: (1) Receives a
recommendation of any securities transaction or investment strategy
involving securities from a broker, dealer or a natural person who is
an associated person of a broker or dealer, and (2) uses the
recommendation primarily for personal, family, or household purposes.''
\156\ The definition generally tracks the definition of ``retail
customer'' under Section 913(a) of the Dodd-Frank Act, except as
discussed below.
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    \156\ We believe that, pursuant to existing regulations, broker-
dealers would generally be required to obtain sufficient facts
concerning a retail customer to determine an account's primary
purpose for purposes of Regulation Best Interest. For example, FINRA
members are required to use reasonable diligence, in regard to the
opening and maintenance of every account, to know (and retain) the
essential facts concerning every customer and concerning the
authority of each person acting on behalf of such customer. See
FINRA Rule 2090 (Know Your Customer). Additionally, FINRA members
are required to ascertain the customer's investment profile under
FINRA suitability obligations. See FINRA Rule 2111 (Suitability).
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    The Commission preliminarily believes this proposed definition is
appropriate, and in particular, the limitation to recommendations that
are ``primarily for personal, family or household purposes,'' as we
believe it excludes recommendations that are related to business or
commercial purposes, but remains sufficiently broad and flexible to
capture recommendations related to the various reasons retail customers
may invest (including, for example, for retirement, education, and
other savings purposes). As discussed in more detail above, the
Commission and studies have historically been, and continue to be,
focused on the potential investor harm that conflicted advice can have
on investors investing for present and future financial goals.\157\ The

Commission continues to believe the focus of Regulation Best Interest
should remain on investors with these personal goals but we request
comment below on whether the definition of ``retail customer'' should
be expanded or harmonized with the proposed definition of ``retail
investor'' in the Relationship Summary Proposal, as defined and
described below.
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    \157\ See, e.g., 913 Study (focusing on retail investors trying
to manage their investments to meet their own and their families'
financial goals); RAND Study; Siegel & Gale Study; CFA 2010 Survey.
See also IAC Recommendation; Section I.A.
---------------------------------------------------------------------------

    As noted, this definition differs from the definition of ``retail
customer'' under Section 913 in three relevant aspects. First, for the
reasons discussed above,\158\ the Commission proposes to substitute
``recommendation of any securities transaction or investment strategy
involving securities'' for ``personalized investment advice about
securities.''
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    \158\ See supra Section II.C.2.
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    Second, the Commission proposes to extend the Section 913
definition beyond natural persons to any persons, provided the
recommendation is primarily for personal, family, or household
purposes. This extension would cover non-natural persons that the
Commission believes would benefit from the protections of Regulation
Best Interest (such as trusts that represent the assets of a natural
person).\159\ As discussed in Section II.E below, in light of this
expansion from ``natural person'' to any person, we are proposing a
new, separate recordkeeping requirement, as, among other things, the
similar existing recordkeeping requirements refer only to ``natural
persons.''
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    \159\ This differs from the approach taken under current FINRA
suitability obligations, which as discussed below, provide an
exemption to broker-dealers from the customer-specific suitability
obligation with respect to ``institutional accounts,'' including
very high net worth natural persons, if certain conditions are met.
Under the Commission's proposal, to the extent that the
recommendation is not primarily used for personal, family, or
household purposes, ``institutional accounts,'' as defined in FINRA
Rules, would fall outside the definition of retail customer and be
excluded from Regulation Best Interest, and as a consequence
recommendations to such accounts would be solely subject to FINRA's
suitability rule.
    Under the FINRA rules, a broker-dealer's suitability obligations
are different for certain institutional customers than for non-
institutional customers. A broker-dealer is exempt from its
customer-specific suitability obligation for an institutional
account, if the broker-dealer: (1) Has a reasonable basis to believe
that the institutional customer is capable of evaluating the risks
independently, both in general and with regard to particular
transactions and investment strategies, and (2) the institutional
customer affirmatively indicates that it is exercising independent
judgment in evaluating the broker-dealer's recommendations. FINRA
2111(b).
---------------------------------------------------------------------------

    Third, the proposed definition would only apply to a person who
``receives a recommendation . . . from a broker or dealer or a natural
person who is an associated person of a broker or dealer,'' and does
not include a person who receives a recommendation from an investment
adviser acting as such. This definition is appropriate as Regulation
Best Interest only applies in the context of a brokerage relationship
with a brokerage customer, and in particular, when a broker-dealer is
making such a recommendation in the capacity of a broker-dealer.\160\
In other words, Regulation Best Interest would not apply to the
relationship between an investment adviser and its advisory client (or
any recommendations made by an investment adviser to an advisory
client).\161\ Accordingly, dual-registrants would be required to comply
with Regulation Best Interest only when making a recommendation in
their capacity as a broker-dealer.
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    \160\ This approach will facilitate broker-dealers building upon
their current compliance infrastructure and will enhance investor
protections to retail customers seeking financial services. FINRA's
suitability rule applies to a person who is not a broker-dealer who
opens a brokerage account at a broker-dealer or who purchases a
security for which the broker-dealer receives or will receive,
directly or indirectly, compensation even though the security is
held at an issuer, the issuer's affiliate or custodial agent, or
using another similar arrangement. See FINRA Regulatory Notice 12-
55, Guidance on FINRA's Suitability Rule (Dec. 2012) at Q6(a). A
broker-dealer customer relationship could also arise if the
individual or entity has an informal business relationship related
to brokerage services, as long as the individual or entity is not a
broker-dealer. See FINRA Regulatory Notice 12-25 at Q6.
    In some instances, a brokerage relationship with a brokerage
customer can exist without a formal brokerage account (e.g., as
established by an agreement with the broker-dealer). For example,
broker-dealers can assist retail customers in purchasing mutual
funds or variable insurance products to be held with the mutual fund
or variable insurance product issuer, by sending checks and
applications directly to the fund or issuer (this is sometimes
referred to as ``check and application,'' ``application-way,''
``subscription-way'' or ``direct application'' business; we use the
term ``check and application'' for simplicity) even if that retail
investor does not have an account with the broker-dealer. The
broker-dealer is typically listed as the broker-dealer of record on
the retail customer's account application, and generally receives
fees or commissions resulting from the retail customer's
transactions in the account. See, e.g., FINRA Notice to Members 04-
72, Transfers of Mutual Funds and Variable Annuities (Oct. 2004).
Regulation Best Interest would apply to recommendations of such
transactions even in the absence of a formal account.
    \161\ In a concurrent release, we are proposing an
interpretation that would reaffirm--and in some cases clarify--
certain aspects of the fiduciary duty that an investment adviser
owes to its clients. See Fiduciary Duty Interpretive Release.
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    Regulation Best Interest and its specific obligations, including
the Disclosure Obligation, Care Obligation, and Conflicts Obligations,
would not apply to advice provided by a dual-registrant when acting in
the capacity of an investment adviser, even if the person to whom the
recommendation is made also has a brokerage relationship with the dual-
registrant or even if the dual-registrant executes the transaction.
Similarly, when an investment adviser provides advice, the rule would
not apply to an affiliated broker-dealer or to a third-party broker-
dealer with which a natural associated person of the investment
advisers is associated if such broker-dealer executes the transaction
in the capacity of a broker or dealer. For example, in the case of a
dual-registrant that provides advice with respect to an advisory
account and subsequently executes the transaction, Regulation Best
Interest would not apply to the advice and transaction because the firm
acted in the capacity of a broker-dealer solely when executing the
transaction and not when providing advice about a securities
transaction. In this case, when the advice is provided in the capacity
of an investment adviser, the firm would be required to comply with the
obligations prescribed under an investment adviser's fiduciary duty, as
described in more detail in the Fiduciary Duty Interpretive Release.
    The Commission recognizes that making the determination of whether
a dual-registrant is acting in the capacity of a broker-dealer or an
investment adviser is not free from doubt, and this issue has existed
for dual-registrants prior to the proposal of Regulation Best Interest.
Generally, determining whether a recommendation made by a dual-
registrant is in its capacity as broker-dealer requires a facts and
circumstances analysis, with no one factor being determinative. When
evaluating this issue, the Commission considers, among other factors,
the type of account (advisory or brokerage), how the account is
described, the type of compensation, and the extent to which the dual-
registrant made clear the capacity in which it was acting to the
customer or client. We also have held the view that a dual-registrant
is an investment adviser solely with respect to those accounts for
which it provides advice or receives compensation that subjects it to
the Advisers Act.\162\ This interpretation of the Advisers Act permits
a dual-registrant to distinguish its brokerage customers from its
advisory clients. We recognize that this determination can leave
interpretive and other challenges for dual-registrants with clients
that have both brokerage and advisory accounts with the dual-
registrant. Our Disclosure Obligation is designed to help address some
of these challenges as the Commission believes

it will help clarify the capacity in which a dual-registrant is acting.
---------------------------------------------------------------------------

    \162\ See Release 51523; 2007 Proposing Release.
---------------------------------------------------------------------------

    By proposing Regulation Best Interest, we are not intending to
change the analysis regarding whether an investor is a brokerage
customer or an advisory client, as we believe this issue is outside the
scope of this rulemaking.\163\ However, we seek comment below on this
historical approach and whether particular scenarios involving
investors with brokerage and advisory accounts need further
clarification.
---------------------------------------------------------------------------

    \163\ Id.
---------------------------------------------------------------------------

    The proposed definition of ``retail customer'' also differs from
the definition of ``retail investor'' proposed in the Relationship
Summary Proposal, which is a prospective or existing client or customer
who is a natural person (an individual), regardless of the individual's
net worth (thus including, e.g., accredited investors, qualified
clients or qualified purchasers).\164\ The relationship summary
contemplated in the Relationship Summary Proposal, as defined and
described below in Section II.D.1., is intended for a broader range of
investors, before or at the time they first engage the services of a
broker-dealer, to provide important information for them to consider
when choosing a firm and a financial professional.\165\ The Commission
does not believe it is inconsistent or inappropriate, but rather
beneficial, to require firms to provide a relationship summary to all
natural persons to facilitate their understanding of the account
choices, regardless of whether the retail customers will receive
recommendations primarily for personal, family, or household purposes.
Regulation Best Interest and its intended focus, however, is more
limited in scope, in order to cover recommendations to ``retail
customers'' who have chosen to engage the services of a broker-dealer
after receiving the Relationship Summary required by the Relationship
Summary Proposal.\166\
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    \164\ The 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. See
Relationship Summary Proposal, supra Section II.D.1.
    \165\ See Relationship Summary Proposal, supra note 8 and
accompanying text.
    \166\ Id.
---------------------------------------------------------------------------

    Furthermore, consistent with the definition of ``retail customer''
in Section 913 of the Dodd-Frank Act, except as noted above, and the
913 Study recommendation, the Commission is proposing to limit the
application of Regulation Best Interest to any person, or the legal
representative of such person, receiving and using a recommendation
primarily for personal, family, or household purposes, such as trusts
that represent natural persons. Given that our proposed definition
applies to ``any person'' and not ``natural persons'' as used in the
Relationship Summary Proposal, we believe it is appropriate to limit
the definition to persons who receive recommendations primarily for
these specified purposes, consistent with the Commission's historical
focus,\167\ as we do not intend at this time for Regulation Best
Interest to apply to all recommendations to any person. Without such a
limitation, we are concerned that this rule would apply to
recommendations that are primarily for business purposes (such as any
recommendations to institutions), which is beyond the intended focus of
Regulation Best Interest, as discussed above.
---------------------------------------------------------------------------

    \167\ See supra notes 157 and 166 and accompanying text.
---------------------------------------------------------------------------

5. Request for Comment on Key Terms and Scope of Best Interest
Obligation
    The Commission requests comment generally on the key terms and
scope of the best interest obligation.
     Do commenters agree with the general approach of the best
interest obligation of building on existing requirements?
     Should retail customers be permitted to amend their
contracts with broker-dealers to modify the terms of Regulation Best
Interest?
    The Commission also requests comment specifically on the proposed
definition of ``natural person who is an associated person.''
     Do commenters agree that proposed Regulation Best Interest
should apply to natural persons that are associated persons of a
broker-dealer? Why or why not?
     Are there alternative definitions that the Commission
should consider?
     Is the proposed rule's limitation of applicability to ``a
natural person who is an associated person'' appropriate? Why or why
not?
     Should the Commission broaden or limit the scope of
individuals to whom Regulation Best Interest applies? For example,
should it apply to small business entities such as a sole
proprietorship? Why or why not?
    The Commission also requests comment specifically on the scope of
the term ``recommendation.''
     Should the Commission define the term ``recommendation''?
If so, should we define ``recommendation'' as described above?
     Does the term ``recommendation'' capture all of the
actions to which Regulation Best Interest should apply? Why or why not?
     Should the Commission limit the application of Regulation
Best Interest to when a recommendation is made? Why or why not?
     Is sufficient clarity provided regarding what ``at the
time the recommendation is made'' means? Should the Commission define
this phrase? Why or why not?
     Should Regulation Best Interest also cover broker-dealers
that only offer a limited range of products, or that are engaging in
other activities, even when not making a ``recommendation'' as
discussed above? Why or why not?
     Instead, should Regulation Best Interest apply when a
broker-dealer is providing ``personalized investment advice''? Why or
why not? If so, how should the Commission define ``personalized
investment advice''? Should the Commission definition follow the 913
Study, which recommended that such a definition should at a minimum
encompass the making of a ``recommendation,'' and should not include
``impersonal investment advice''? \168\ What broker-dealer activities
would be covered by using this definition that would not be currently
covered by limiting the rule to a ``recommendation''?
---------------------------------------------------------------------------

    \168\ See 913 Study at 123-27.
---------------------------------------------------------------------------

     As noted above, the term ``recommendation'' has been
interpreted in the context of Commission rules, the FINRA suitability
requirement, and the DOL Fiduciary Rule. Should the Commission define
or describe more fully what is a ``recommendation'' in this context?
Should the Commission interpret the term ``recommendation'' differently
than it has been interpreted by the Commission and FINRA to date? If
so, what should the interpretation be and why? In what specific
circumstances, if any, would additional guidance as to the meaning of
``recommendation'' be useful? Does the description of what would be a
recommendation provide sufficient clarity in this regard? Why or why
not?
     Has the Commission appropriately distinguished a
recommendation from investor education? Why or why not? If not, what
communications should be considered a recommendation or alternatively,
investor education? How would these situations differ from the current
standards with respect to what is a recommendation versus investor
education?
     Regulation Best Interest would apply to both discretionary
and non-discretionary recommendations made by a broker-dealer. Do
commenters agree

that Regulation Best Interest should apply to any discretionary
recommendation made by a broker-dealer? \169\ Courts have found broker-
dealers that exercise discretion or de facto control of an account to
be fiduciaries under state law. What additional protections do
brokerage customers receive, if any, when their broker-dealers are
considered fiduciaries under state law? Does Regulation Best Interest
adequately account for these additional protections?
---------------------------------------------------------------------------

    \169\ See also infra Section II.F. for a discussion and request
for comment regarding broker-dealer exercise of discretion and the
extent to which such exercise is ``solely incidental'' to the
conduct of its business as a broker-dealer.
---------------------------------------------------------------------------

    The Commission requests comment on the scope of ``any securities
transaction or investment strategy involving securities.''
     Do commenters agree that proposed Regulation Best Interest
should apply to recommendations of ``any securities transaction or
investment strategy involving securities''? Do commenters agree with
our proposed interpretation of the scope of these terms? Why or why
not?
     Do commenters have alternative suggestions on the types of
recommendations to which Regulation Best Interest would apply? Please
specifically identify any recommendations that should be covered by the
proposed rule and explain why they should be covered.
     Are there other broker-dealer recommendations that are not
captured by these terms that should be covered by Regulation Best
Interest? Please specify any recommendations that would not be covered
by the proposed rule and why they should or should not be covered.
     Should the Commission provide additional guidance as to
what is or is not an ``investment strategy involving securities''?
Please identify where further guidance is needed and why
recommendations should or should not be viewed as an ``investment
strategy involving securities.''
     Should the Commission extend Regulation Best Interest to
recommendations of account types even if the recommendation is not tied
to a securities transaction? If so, what factors should a broker-dealer
consider in making a recommendation of an account type? Should the
factors differ if the account type recommended is discretionary versus
non-discretionary? Should they differ for dual-registrants versus
standalone broker-dealers?
     Should the rule include an obligation to perform ongoing
or periodic evaluation of whether an account type initially recommended
remains appropriate? If so, how frequently and what factors should that
evaluation take into consideration?
     What factors do firms consider in determining the
appropriateness of an account for a particular investor, if any, and
what weight is given to the factors considered (i.e., do certain
factors carry more weight than others)?
     What policies and procedures do firms currently use, if
any, to supervise recommendations by their associated persons of
account types?
     How do firms mitigate incentives for associated persons to
recommend inappropriate account types?
    The Commission requests comment on the definition of ``retail
customer.''
     Do commenters agree with the proposed definition of
``retail customer''? Why or why not? Should the definition be narrowed
or expanded in any way? For example, should it apply to small business
entities such as a sole proprietorship? Why or why not?
     Are there are other definitions of ``retail customer''
that the Commission should consider? If so, please provide any
alternative definition and the reasons why it is being suggested. For
example, should the Commission instead use the definition of ``retail
investor'' that is being proposed in the Relationship Summary or that
is used in the 913 Study?
     Regulation Best Interest would apply to recommendations to
retail customers, while FINRA's general suitability requirements apply
to recommendations to all customers (although a broker-dealer is exempt
from its customer-specific suitability obligation for an institutional
account, if certain conditions are met).\170\ Do commenters agree that
having differing standards of care for different broker-dealer
customers is appropriate? Why or why not? Would differing standards for
different customers of broker-dealers confuse retail or other
customers? Would differing standards for different customers make it
more difficult for broker-dealers to comply with their obligations?
---------------------------------------------------------------------------

    \170\ FINRA Rule 2111(b).
---------------------------------------------------------------------------

     Do commenters believe that the definition of ``retail
customer'' should instead only include all natural persons as under
Section 913? Why or why not?
     Do commenters believe the limitation of the proposed
definition of ``retail customer'' to recommendations primarily for
``personal, family or household purposes'' is appropriate and clear?
Why or why not? As proposed, the definition of ``retail customer,''
including the limitation, would cover, for example, participants in
ERISA-covered plans and IRAs. Should participants in these types of
plans be covered? Why or why not? Do firms require more guidance
regarding the current application of the law to specific scenarios?
Should the limitation be omitted? Why or why not?
     The Commission requests comment on the proposed approach
with respect to dual-registrants. How do firms currently make the
determination of what capacity a dual-registrant is acting in when
making a recommendation or otherwise? Do commenters require more
guidance regarding the current application of the law to specific
scenarios? Do commenters agree with the Commission's interpretations of
when a dual-registrant is acting as an investment adviser? Why or why
not? Do commenters agree with the Commission's interpretations of when
a dual-registrant is acting as a broker-dealer? Why or why not?

D. Components of Regulation Best Interest

    As part of Regulation Best Interest, we are proposing specifying
that the obligation to ``act in the best interest of the retail
customer . . . . without placing the financial or other interest of the
[broker-dealer] ahead of the retail customer'' shall be satisfied if
the broker-dealer complies with four component requirements: A
Disclosure Obligation, a Care Obligation, and two Conflict of Interest
Obligations. Each of these components is discussed below. Failure to
comply with any of these requirements when making a recommendation of
any securities transaction or investment strategy involving securities
to a retail customer would violate Regulation Best Interest.
    In specifying by rule these obligations, we intend to provide
clarity to broker-dealers on the requirements of the best interest
obligation. To that end, the best interest obligation does not impose
any obligations other than those specified by the rule: Namely, to act
in the best interest of the retail customer without placing the
financial or other interest of the broker-dealer ahead of the retail
customer's interest, by complying with each of the components as set
forth in paragraph (a)(2) of the rule.
    We wish to reemphasize that we recognize that components of these
obligations draw from obligations that have been interpreted under the
antifraud provisions of the federal securities laws, or may be
specifically addressed by the Exchange Act or the rules thereunder or
SRO rules. In proposing these obligations, we are not

proposing to amend or eliminate existing broker-dealer obligations, and
compliance with Regulation Best Interest is not determinative of a
broker-dealer's compliance with obligations under the general antifraud
provisions of the federal securities laws.\171\
---------------------------------------------------------------------------

    \171\ Any transaction or series of transactions, whether or not
effected pursuant to the provisions of Regulation Best Interest,
remain subject to the antifraud and anti-manipulation provisions of
the securities laws, including, without limitation, Section 17(a) of
the Securities Act [15 U.S.C. 77q(a)] and Sections 9, 10(b), and
15(c) of the Exchange Act [15 U.S.C. 78i, 78j(b), and 78o(c)].
---------------------------------------------------------------------------

1. Disclosure Obligation
    The Commission is proposing the Disclosure Obligation, which would
require a broker-dealer, or natural person who is an associated person
of a broker or dealer ``to, prior to or at the time of such
recommendation, reasonably disclose to the retail customer, in writing,
the material facts relating to the scope and terms of the relationship
with the retail customer and all material conflicts of interest
associated with the recommendation.'' We believe that an important
aspect of the broker-dealer's best interest obligation is to facilitate
its retail customers' awareness of certain key information regarding
their relationship with the broker-dealer.\172\ Specifically, and as
discussed more below, to meet the Disclosure Obligation, we would
consider the following to be examples of material facts relating to the
scope and terms of the relationship with the retail customer: (i) That
the broker-dealer is acting in a broker-dealer capacity with respect to
the recommendation; (ii) fees and charges that apply to the retail
customer's transactions, holdings, and accounts; and (iii) type and
scope of services provided by the broker-dealer, including, for
example, monitoring the performance of the retail customer's account.
While these examples are indicative of what the Commission believes
would generally be material facts regarding the scope and terms of the
relationship, brokers, dealers, and natural persons who are associated
persons of a broker or dealer would need to determine what other
material facts relate to the scope and terms of the relationship, and
reasonably disclose them in writing prior to or at the time of a
recommendation. Additionally, this Disclosure Obligation would
explicitly require the broker-dealer to, prior to or at the time of
such recommendation, reasonably disclose in writing all material
conflicts of interest \173\ associated with the recommendation.
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    \172\ Several commenters maintained that a disclosure
requirement with such information would be an effective approach to
addressing consumer confusion. See, e.g., State Farm 2017 Letter
(recommending a simplified account opening disclosure that includes:
(1) The type of relationship being entered into and specific duties
owed to the consumer based on the services performed; (2) the
services available as part of the relationship, and information
about applicable direct and indirect investment-related fees; and
(3) information about material conflicts of interest that apply to
these relationships, including material conflicts arising from
compensation arrangements or proprietary products); Letter from Paul
S. Stevens, President and CEO, Investment Company Institute (Feb. 5,
2018) (``ICI February 2018 Letter'') (recommending a best interest
standard requiring broker-dealers to disclose to retail customers
certain aspects of their relationship with the retail customer,
``such as the type and scope of services provided, the applicable
standard of conduct, the types of compensation it or its associated
persons receive, and any material conflicts of interest''); Letter
from Michelle B. Oroschakoff, LPL Financial, (Feb. 22, 2018) (``LPL
Financial'') (recommending a standard of conduct that requires clear
and comprehensive disclosure to retail investors explaining material
information about their services, including the nature of the
services, investment products, compensation, and material conflicts
of interest).
    \173\ Under Regulation Best Interest, as proposed, a broker-
dealer's obligation to disclose material conflicts of interest would
resemble the duty to disclose material conflicts that has been
imposed on broker-dealers found to be acting in a fiduciary
capacity. See, e.g., United States v. Szur, 289 F.3d 200, 212 (2d
Cir. 2002) (broker's fiduciary relationship with customer gave rise
to a duty to disclose commissions to customer, which would have been
relevant to customer's decision to purchase stock); Arleen W.
Hughes, Exchange Act Release No. 4048 (Feb. 18, 1948) (Commission
Opinion), aff'd sub nom. Hughes v. Sec. & Exch. Comm'n, 174 F.2d
969, 976 (D.C. Cir. 1949) (broker acted in the capacity of a
fiduciary and, as such, broker was under a duty to make full
disclosure of the nature and extent of her adverse interest,
``including her cost of the securities and the best price at which
the security might be purchased in the open market'').
---------------------------------------------------------------------------

    We understand that broker-dealers typically provide information
about their services and accounts, which may include disclosure
concerning the broker-dealer's capacity, fees, services, and
conflicts,\174\ on their firm websites and in their account opening
agreements. While broker-dealers are subject to a number of specific
disclosure obligations when they effect certain customer
transactions,\175\ and are subject to additional disclosure obligations
under the antifraud provisions of the federal securities laws,\176\
broker-dealers are not currently subject to an explicit and broad
disclosure requirement under the Exchange Act.\177\ To promote broker-

dealer recommendations that are in the best interest of retail
customers, we believe it is necessary to impose a more explicit
disclosure obligation on broker-dealers than what currently exists
under the federal securities laws and SRO rules.
---------------------------------------------------------------------------

    \174\ The 913 Study noted that, in practice, required
disclosures of conflicts have been more limited with broker-dealers
than with investment advisers. See 913 Study at 106. In addition,
the Tully Report focused on the potential harm to investors due to
broker-dealer conflicts of interest and in particular those related
to compensation. As a best practice, the Tully Report suggested
increased disclosure. See also Tully Report at 16 (finding that full
disclosure of the broker-dealer compensation practices could reduce
the ``potential for conflict and abuse); discussion supra Section
I.A.
    \175\ See, e.g., Exchange Act Rule 10b-10, which generally
requires a broker-dealer effecting customer transactions in
securities (other than U.S. savings bonds or municipal securities)
to provide written notification to the customer, at or before
completion of the transaction, disclosing information specific to
the transaction, including whether the broker-dealer is acting as
agent or principal and its compensation, as well as any third-party
remuneration it has received or will receive. 17 CFR 240.10b-10. See
also Exchange Act Rules 15c1-5 and 15c1-6, which require a broker-
dealer to disclose in writing to the customer if it has any control,
affiliation, or interest in a security it is offering or the issuer
of such security. 17 CFR 240.15c1-5 and 15c1-6. There are also
specific, additional obligations that apply, for example, to
recommendations by research analysts in research reports and to
public appearances under Regulation Analyst Certification (AC). See,
e.g., 17 CFR 242.500 et seq. Finally, SRO rules apply to specific
situations, such as FINRA Rule 2124 (Net Transactions with
Customers); FINRA Rule 2262 (Disclosure of Control Relationship with
Issuer), and FINRA Rule 2269 (Disclosure of Participation or
Interest in Primary or Secondary Distribution).
    \176\ See, e.g., supra note 87. Broker-dealers are liable under
the antifraud provisions for failure to disclose material
information to their customers when they have a duty to make such
disclosure. See Basic v. Levinson, 485 U.S. 224, 239 n.17 (1988)
(``Silence, absent a duty to disclose, is not misleading under Rule
10b-5.''); Chiarella v. U.S., 445 U.S. 222, 228 (1980) (explaining
that a failure to disclose material information is only fraudulent
if there is a duty to make such disclosure arising out of ``a
fiduciary or other similar relation of trust and confidence''); SEC
v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999)
(explaining that defendant is liable under Section 10(b) and Rule
10b-5 for material omissions ``as to which he had a duty to
speak'').
    Generally, under the antifraud provisions, a broker-dealer's
duty to disclose material information to its customer is based upon
the scope of the relationship with the customer, which is fact
intensive. See, e.g., Conway v. Icahn & Co., Inc., 16 F.3d 504, 510
(2d Cir. 1994) (``A broker, as agent, has a duty to use reasonable
efforts to give its principal information relevant to the affairs
that have been entrusted to it.'').
    For example, where a broker-dealer processes its customers'
orders, but does not recommend securities or solicit customers, then
the material information that the broker-dealer is required to
disclose is generally narrow, encompassing only the information
related to the consummation of the transaction. See, e.g., Press v.
Chemical Inv. Servs. Corp., 166 F.3d 529, 536 (2d Cir. 1999).
However, courts and the Commission have found that a broker-dealer's
duty to disclose material information under the antifraud provisions
is broader when the broker-dealer is making a recommendation to its
customer. See, e.g., Hanly, 415 F.2d 589, 597 (2d Cir. 1969). When
recommending a security, broker-dealers generally are liable under
the antifraud provisions if they do not give ``honest and complete
information'' or disclose any material adverse facts or material
conflicts of interest, including any economic self-interest. See,
e.g., De Kwiatkowski v. Bear, Stearns & Co., 306 F.3d 1293, 1302 (2d
Cir. 2002); Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1172 (2d
Cir. 1970).
    \177\ Broker-dealers may be subject to additional disclosure
requirements imposed by other regulators. For example, as noted, the
BIC Exemption and related PTEs impose detailed disclosure conditions
on broker-dealers that rely on those exemptions. Other DOL
regulations and exemptions also impose disclosure requirements
applicable to broker-dealers providing advisory and other services
to ERISA-covered plans and IRAs. See, e.g., 29 CFR 2550.408g-
1(b)(7)(G) (regulation under statutory exemption for participant
advice requires fiduciary advisers to plans and IRAs seeking relief
to deliver certain disclosures and acknowledge fiduciary status); 29
CFR 2550.408b-2(c)(iv)(B) (regulation under statutory exemption for
reasonable service arrangements requires certain ERISA plan service
providers to disclose certain information in writing including
(among other things) a description of the services to be provided,
the fees to be paid directly and indirectly by the plan and, if
applicable, a statement that the service provider will provide or
reasonably expects to provide services as a ``fiduciary'' as defined
by ERISA).
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    This Disclosure Obligation also forms an important part of a
broader effort to address retail investor confusion, as further
discussed in a separate concurrent rulemaking.\178\ Studies have shown
that retail investors are confused about the differences among
financial service providers, such as broker-dealers, investment
advisers, and dual-registrants.\179\ We have carefully considered these
concerns regarding investor confusion, and are committed to
facilitating greater clarity for retail investors. In our concurrent
rulemaking, we propose to: \180\ (1) Require broker-dealers and
investment advisers to provide to retail investors \181\ a short (i.e.,
four page or equivalent limit if in electronic format) relationship
summary (``Relationship Summary''); \182\ (2) restrict broker-dealers
and associated natural persons of broker-dealers, when communicating
with a retail investor, from using the term ``adviser'' or ``advisor''
in specified circumstances; and (3) require broker-dealers and
investment advisers, and their associated natural persons and
supervised persons, respectively, to disclose, in retail investor
communications, the firm's registration status with the Commission and
an associated natural person's and/or supervised person's relationship
with the firm (``Regulatory Status Disclosure'').\183\
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    \178\ See Relationship Summary Proposal.
    \179\ See, e.g., Siegel & Gale Study; RAND Study. See also CFA
2010 Survey.
    \180\ See Relationship Summary Proposal.
    \181\ As described in more detail under the definition of
``retail customer'' in Section II.C.4, the definition used in this
proposed rulemaking differs from the definition of ``retail
investor'' used in the Relationship Summary Proposal.
    \182\ The customer or client relationship summary is being
proposed as ``Form CRS.''
    \183\ See Relationship Summary Proposal.
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    These proposed obligations reflect common goals and touch on issues
that are also contemplated under the proposed Disclosure Obligation
under Regulation Best Interest, notably clarifying the capacity in
which a firm or financial professional is acting, minimizing investor
confusion, and facilitating greater awareness of key aspects of a
relationship with a firm or financial professional, such as the
applicable standard of conduct, fees, and material conflicts of
interest. We believe these obligations complement each other and,
consistent with our layered approach to disclosure, are designed to
build upon each other to provide different levels of key information
that we preliminarily believe are appropriate at different points of
the relationship with a broker-dealer.
    The Relationship Summary highlights certain features of an
investment advisory or brokerage relationship, which is designed to
alert retail investors to information for them to consider when
choosing a firm and a financial professional. This would be achieved by
requiring that the Relationship Summary be initially delivered to a
retail investor before or at the time a retail investor enters into an
investment advisory agreement or first engages a brokerage firm's
services.\184\
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    \184\ We note that the Relationship Summary may be provided
after the retail investor has initially decided to meet with the
firm or its financial professional, a selection which may have been
based on such person's name or title. This highlights the importance
of facilitating clarity and accuracy in the use of names and titles,
as is intended by the proposed restrictions on titles and the
Regulatory Status Disclosure. See Relationship Summary Proposal.
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    By virtue of the high level nature of the disclosures in the
Relationship Summary, constituting a mix of prescribed language and
more firm-specific disclosures, and the space constraints (no more than
four pages or equivalent limit if in electronic format), the
Relationship Summary would form just one part of a broker-dealer's
broader set of disclosures. Firms would include information retail
investors need to understand the services, fees, conflicts, and
disciplinary history of firms and financial professionals they are
considering, along with references and links to other disclosure where
interested investors can find more detailed information. In this way,
the Relationship Summary is intended to foster a layered approach to
disclosure, as described above. It is also designed to facilitate
comparisons across firms that offer the same or substantially similar
services.\185\
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    \185\ For further discussion, see Relationship Summary Proposal.
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    The Disclosure Obligation under Regulation Best Interest further
builds on and complements these obligations as it would require a
broker-dealer or natural person who is an associated person of a
broker-dealer to, prior to or at the time of the recommendation,
reasonably disclose, in writing, the material facts relating to the
scope and terms of the relationship with the retail customer and all
material conflicts of interest associated with the recommendation. The
Disclosure Obligation under Regulation Best Interest would apply
specifically to the broker-dealer or natural person who is an
associated person of the broker-dealer and the specific recommendation
triggering Regulation Best Interest.
    For example, whereas the Relationship Summary would require a brief
and general description of the types of fees and expenses that retail
investors will pay, under the Disclosure Obligation we would generally
expect broker-dealers to build upon the Relationship Summary to provide
more specific fee disclosures relevant to the recommendation to the
retail customer and the particular brokerage account for which
recommendations are made. In addition, while the Relationship Summary
would require a high-level description of specified conflicts of
interest, the Disclosure Obligation would require more comprehensive
disclosure of all material conflicts of interest related to the
recommendation to the retail customer.
    Thus, as a general matter, the Regulatory Status Disclosure and the
Relationship Summary reflect initial layers of disclosure, with the
Disclosure Obligation reflecting more specific and additional, detailed
layers of disclosure.\186\
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    \186\ Nevertheless, as discussed below where relevant, in some
instances, disclosures made pursuant to the Regulatory Status
Disclosure or the Relationship Summary may be sufficient to satisfy
some aspects of this Disclosure Obligation.
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a. Disclosure of Material Facts Relating to the Scope and Terms of the
Relationship
    As noted above, to meet this Disclosure Obligation, we would
generally consider the following to be examples of material facts
relating to the scope and terms of the relationship with the retail
customer: (i) That the broker-dealer is acting in a broker-dealer
capacity with respect to the recommendation; (ii) fees and charges that
apply to the retail customer's transactions, holdings, and accounts;
and (iii) type and scope of services provided by the broker-dealer,
including, for example, monitoring the performance of the retail
customer's account. This Disclosure Obligation

would also require broker-dealers and natural persons who are
associated persons of the broker-dealer to determine, based on the
facts and circumstances, whether there are other material facts
relating to the scope and terms of the relationship with the retail
customer that would need to be disclosed. For example, this would
include considering whether it is necessary, and if so how, to build
upon the high-level summary disclosures pursuant to the Relationship
Summary.
(1) Capacity
    We have identified the capacity in which a broker-dealer is acting
as a likely material fact relating to the scope and terms of the
relationship that would be subject to the Disclosure Obligation. In
doing so, we hope to achieve greater awareness among retail customers
of the capacity in which their financial professional or firm acts when
it makes recommendations \187\ so that the retail customer can more
easily identify and understand the relationship, scope of services, and
standard of conduct that applies to such recommendations. As noted
above, the broker-dealer's standard of conduct would be disclosed in
plain language in the Relationship Summary.
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    \187\ See supra Section II.B.
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    For a broker-dealer that is not a dual-registrant (a ``standalone
broker-dealer''), or a natural person that is an associated person of a
standalone broker-dealer (and that natural person is not also a
supervised person of a registered investment adviser), the broker-
dealer or associated person would disclose that it is acting in a
broker-dealer capacity by complying with the Relationship Summary and
the Regulatory Status Disclosure requirements of the Relationship
Summary Proposal, described above. Because the Disclosure Obligation
would require disclosure ``prior to, or at the time of'' the
recommendation, the broker-dealer generally would not be expected to
repeat the disclosure each time it makes a recommendation. Rather, we
would consider the broker-dealer to have reasonably disclosed the
capacity in which it is acting at the time of the recommendation, if
the broker-dealer had already--``prior to . . . the time of'' the
recommendation--delivered the Relationship Summary to the retail
customer in accordance with the requirements of proposed Exchange Act
Rule 17a-14 and had complied with the Regulatory Status Disclosure. We
believe that delivery of the Relationship Summary would clearly
articulate to the retail customer that he/she has a relationship with a
broker-dealer, and that the broker-dealer must act in his/her best
interest when providing advice in the form of a recommendation in the
capacity of a broker or dealer, in addition to other specified
information concerning the broker-dealer. Moreover, the Regulatory
Status Disclosure would help ensure that each written or electronic
investor communication clearly alerts the retail customer to the
capacity in which the firm or financial professional acts.
    Retail customers of dual-registrants or of financial professionals
who are dually-registered may be more susceptible to confusion
regarding the capacity in which their firms or financial professionals
are acting with respect to any particular recommendation. For that
reason, delivery of the Relationship Summary and compliance with the
Regulatory Status Disclosure would not be considered reasonable
disclosure of the capacity in which a dually-registered broker-dealer
or dually-registered individual is acting at the time of the
recommendation. Pursuant to the Relationship Summary Proposal, a dual-
registrant would deliver to the retail customer a Relationship Summary
that describes both the brokerage and advisory services offered by the
firm, and as such, would not provide clarity regarding the capacity in
which the dual-registrant is acting in the context of any particular
recommendation. Similarly, the Regulatory Status Disclosure would
require disclosure of both capacities in which firms and financial
professionals act. Therefore, the Commission would expect a broker-
dealer that is a dual-registrant to do more to meet the Disclosure
Obligation.
    As discussed below in our guidance on reasonable disclosure, we are
not proposing to mandate the form, specific timing, or method for
delivering disclosure pursuant to the Disclosure Obligation, other than
the general requirement that the disclosure be made ``prior to or at
the time of'' the recommendation. Instead, we aim to provide broker-
dealers flexibility in determining how to satisfy the Disclosure
Obligation. As part of that determination, the dual-registrant should
consider how best to assist its retail customers in understanding the
capacity in which it is acting. For example, dual-registrants could
disclose capacity through a variety of means, including, among others,
written disclosure at the beginning of a relationship (e.g., in an
account opening agreement or account disclosure) that clearly sets
forth when the broker-dealer would act in a broker-dealer capacity and
how it will provide notification of any changes in capacity (e.g.,
``All recommendations will be made in a broker-dealer capacity unless
otherwise expressly stated at the time of the recommendation.'' or
``All recommendations regarding your brokerage account will be made in
a broker-dealer capacity, and all recommendations regarding your
advisory account will be in an advisory capacity. When we make a
recommendation to you, we will expressly tell you which account we are
discussing and the capacity in which we are acting.''). So long as the
broker-dealer provides this type of disclosure in writing prior to the
recommendation, we preliminarily believe that the broker-dealer would
not need to provide written disclosure each time it changes capacity or
each time it makes a recommendation, provided it makes clear the
capacity in which the broker-dealer is acting in accordance with its