thereunder, such as investment advisers' fiduciary duty,\608\ broker-
dealers' requirements under proposed Regulation Best Interest \609\
standard, as well as under existing self-regulatory organizations'
rules and the Exchange Act,\610\ reduce the risk that broker-dealers
and investment advisers might use the proposed relationship summary to
exploit potential conflicts of interest between themselves and their
retail investors because these regulations may raise the cost of
misconduct.\611\
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    \605\ See Genevi[egrave]ve Helleringer, Trust Me, I Have a
Conflict of Interest! Testing the Efficacy of Disclosure in Retail
Investment Advice, Oxford Legal Studies Research Paper No. 14/2016
(Mar. 2016), available at https://ssrn.com/abstract=2755734; and
Cain 2005 Article, supra note 581. As discussed above, existing and
proposed rules and regulations for broker-dealers and investment
advisers could mitigate the negative unintended consequences of
disclosures of conflicts of interest.
    \606\ See supra Section IV.B.1.
    \607\ See Burden of Disclosure Article, supra note 584. Further,
this ``panhandler effect'' suggests that in some cases disclosure of
financial professionals' conflicts of interests (particularly in
face-to-face interactions) may create social pressure on retail
investors to meet the financial professionals' interests.
    \608\ Under the Advisers Act, an adviser is a fiduciary whose
duty is to serve the best interest of its clients, including an
obligation not to subrogate clients' interest to its own. SEC v.
Capital Gains Research Bureau, Inc., 375 U.S. at 194 (the United
States Supreme Court held that, under section 206 of the Investment
Advisers Act of 1940, advisers have an affirmative obligation of
utmost good faith and full and fair disclosure of all material facts
to their clients, as well as a duty to avoid misleading them).
Section 206 applies to all firms and persons meeting the Advisers
Act's definition of investment adviser, whether registered with the
Commission, a state securities authority, or not at all. See also
Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17
(1979) (``[T]he Act's legislative history leaves no doubt that
Congress intended to impose enforceable fiduciary obligations.'').
    \609\ See Regulation Best Interest Proposal, supra note 24.
Proposed Regulation Best Interest would establish a standard of
conduct for broker-dealers and associated persons of broker-dealers
to act in the best interest of the retail customer at the time at
recommendation is made without placing the financial or other
interest of the broker-dealer or associated person of a broker-
dealer ahead of the interest of the retail customer. The standard of
conduct obligation shall be satisfied if the broker-dealer or
associated person of the broker-dealer discloses at the time of the
recommendation material facts relating to the scope and terms of the
relationship, which may be satisfied in part by the relationship
summary, and all material conflicts associated with the
recommendation. In addition, broker-dealers would be required to
satisfy the Care and Conflicts of Interest Obligations, as discussed
more fully in the Regulation Best Interest Proposal.
    \610\ For example, a broker-dealer may recommend a security even
when a conflict of interest is present, but that recommendation must
be suitable. See FINRA Rule 2111. The antifraud provisions of the
federal securities laws and the implied obligation of fair dealing
prohibit a broker-dealer from, among other things, making unsuitable
recommendations and require broker-dealers to investigate an issuer
before recommending the issuer's securities to a customer. See,
e.g., Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969). See also
Municipal Securities Disclosure, Exchange Act Release No. 26100
(Sept. 22, 1988), at n.75. The fair dealing obligation also requires
a broker-dealer to reasonably believe that its securities
recommendations are suitable for its customer in light of the
customer's financial needs, objectives and circumstances (customer-
specific suitability). See Release 8662, supra note 118, at 18
(involving excessive trading and recommendations of speculative
securities without a reasonable basis).
    \611\ Consistent with this belief, one study also finds that
regulations and legal sanctions on conflicted advice can mitigate
the effects of moral licensing discussed above. See Bryan Church &
Xi Kuang, Conflicts of Disclosure and (Costly) Sanctions:
Experimental Evidence, Journal of Legal Studies 38 2: 505-532 (Jun.
2009).
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viii. Additional Information
    To facilitate the layered disclosure that the relationship summary
provides, we are proposing to require that firms include a separate
section (``Additional Information'') in the relationship summary
outlining where retail investors can find more information about the
firm's legal and disciplinary events, services, fees, and conflicts.
    Retail investors may benefit from information on where to find
disclosures of the disciplinary events of firms and financial
professionals. For some retail investors, the disciplinary history of
the firm or the financial professional may affect their choices related
to obtaining investment advice. By providing information on whether the
firm or financial professionals have disciplinary history and where to
obtain more detailed information through layered disclosure may
facilitate retail investors' ability to match their expectations with
their choice of financial service provider. The required disclosure
would succinctly state whether or not the firm or its financial
professionals have legal and disciplinary events, based on whether or
not they or their financial professionals currently disclose or are
currently required to disclose certain legal or disciplinary events to
the Commission, self-regulatory organizations, state securities
regulators or other jurisdictions, as applicable. The Additional
Information section would also highlight where retail investors can
find more information about the disciplinary history of the firm and
its financial professionals on ``Investor.gov.'' While the disclosure
of the existence of disciplinary events does not provide new
information to the market,\612\ this simple disclosure in the
relationship summary, if applicable, could help retail investors more
easily identify firms that have reported disciplinary events for
themselves or their financial professionals and where to find more
information about the events. By including this disclosure, in
combination with the requirement to include a specific question for
retail investors to ask about disciplinary history in the ``Key
Questions to Ask'' section (discussed further below), the relationship
summary would potentially make retail investors more likely to seek out
disciplinary history information to use in their evaluation of firms
and financial professionals and would make them better informed when
they choose a firm and a financial professional. Finally, retail
investors themselves have indicated that they consider disciplinary
information important.\613\
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    \612\ See Parts 1 and 2 of Form ADV; Form BD; Form U4.
    \613\ See 917 Financial Literacy Study, supra note 20.
---------------------------------------------------------------------------

    Further, by drawing attention to disciplinary histories of
financial professionals for retail investors, firms could become more
selective in their employment decisions, which could benefit retail
investors by having a potentially more trustworthy pool of financial
professionals to select from when they choose providers of investment
advice, and reduce potential harm to retail investors. As such, the
overall quality of financial advice provided to retail investors could
increase, to the extent that legal and regulatory compliance is
correlated with advice quality.\614\ As a consequence, such disclosures
of disciplinary history could promote retail investor confidence in the
market.
---------------------------------------------------------------------------

    \614\ See Mark Egan, Gregor Matvos & Amit Seru, The Market for
Financial Adviser Misconduct, Journal of Political Economy (Dec. 14,
2017), available at https://ssrn.com/abstract=2739170.
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    One potential cost of the increased salience of the existence of
disciplinary events may be that retail investors could

be deterred from hiring a firm or financial professional with a
disciplinary record, even if they would be better off to do so, without
further investigating the nature of the disciplinary event.
Alternatively, an investor may also incorrectly assume that a firm that
does not report legal/disciplinary history is a ``better'' or a ``more
compliant'' firm than a firm that does report such history; i.e., the
lack of currently reportable disciplinary history could signify a stamp
of approval for some investors. Therefore, disclosures of the existence
of disciplinary events could have an unintended consequence of keeping
some investors out of the market for financial advice or by selecting
financial professionals that could lead to a mismatch with the
expectations of the retail investor.
    This section would also include disclosure of how investors can
contact the firm, the SEC, or FINRA (when applicable) if they have
problems with their investments, investment accounts, or financial
professionals. Highlighting this information may encourage more
outreach by investors when they experience such problems, which may
increase the likelihood of investors seeking resolution of their or the
firm's problems. Further, to the extent investors' awareness of how to
report problems is increased, it may have some incremental disciplining
effect ex ante on financial professionals to the benefit of all retail
investors in this market. For example, if retail investors, once aware
of how to contact the Commission or FINRA are more likely to do so as a
result of the information provided by the relationship summary, firms
and financial professionals may improve standards and implement
policies and procedures aimed at reducing conduct that would warrant
potential outreach to regulators by retail investors.
    Finally, this section would state where to find more information
about the firm and its financial professionals. Broker-dealers would be
required to direct retail investors to additional information about
their brokers and services on BrokerCheck, their firm websites (if they
have a website; if not, they would state where retail investors can
find up-to-date information), and the retail investor's account
agreement. Investment advisers likewise would be required to direct
retail investors to additional information in the firm's Form ADV Part
2 brochure and any brochure supplement provided by a financial
professional to the retail investor. If an adviser has a public website
and maintains a current version of its firm brochure on the website,
the firm would be required to provide the website address (if an
adviser does not have a public website or does not maintain its current
brochure on its public website, then the adviser would provide the IAPD
website address). Making these links to websites available could be
important given that low levels of financial literacy could make it
less likely that investors would effectively compile information on
their own to use in decision making.
ix. Key Questions To Ask
    The proposed relationship summary is expected to benefit retail
investors either directly, by providing information about the
corresponding firm and financial professional, or indirectly, by
encouraging investors to acquire additional information. The
relationship summary would also include suggested key questions to
encourage retail investors to have conversations with their financial
professionals about how the firm's services, fees, conflicts, and
disciplinary events affect them.
    Under the ``Key Questions To Ask'' heading, firms would be required
to include ten questions,\615\ as applicable to their particular
business, to help retail investors to elicit more information
concerning the items discussed in the relationship summary.\616\ Given
that standardization of disclosures limits personalization that may be
valuable to retail investors, the Commission preliminarily believes
that the proposed questions would serve an important purpose in the
relationship summary--namely, to prompt retail investors to ask their
financial professionals for more personalized information.
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    \615\ We are proposing to allow firms to modify or omit portions
of any of these questions that are not applicable to their business.
We are also proposing to require a standalone broker-dealer and a
standalone investment adviser, to modify the questions to reflect
the type of account they offer to retail investors (e.g., advisory
or brokerage account). In addition, we are proposing that firms
could include any other frequently asked questions they receive
following these questions. Firms would not, however, be permitted to
exceed fourteen questions in total. See supra Section II.B.8.
    \616\ See proposed Item 8 of Form CRS.
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    The proposed list of questions in the relationship summary may
alter the actions not only of retail investors but also of firms and
their financial professionals. In anticipation of having to answer
these key questions, firms may find it in their self-interest to train
their staff and develop materials that could help them address the
question in greater detail. Such a voluntary response by firms would
likely benefit investors to the extent the answers given to the
questions may become more informative and more accurate. However, some
firms may develop standardized answers in anticipation of the key
questions that become less informative to the retail investor than a
back and forth conversation.
    We believe the proposed set of questions cover a broad range of
issues that are likely to be important to retail investors and provide
benefits, such as a platform from which to begin a dialogue with their
financial professional. However, potential costs may arise for some
retail investors. One such potential cost of the proposed questions is
that they may anchor the attention of retail investors to the list and
reduce the likelihood that they would explore other potential questions
that could be important to them based on their unique
circumstances.\617\ In addition, framing the questions as ``Key
Questions'' could lead some retail investors to believe that any other
questions they may have due to their own particular circumstances may
be of second order importance, even if they may not be.\618\
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    \617\ Anchoring is a cognitive bias, whereby receivers of
information strongly rely on the initial information received when
making decisions, and do not sufficiently adjust to new information
received. See, Anderson, Jorgen Vitting, Detecting Anchoring in
Financial Markets, Journal of Behavior Finance 11, 129-133 (2010)
available at https://www.tandfonline.com/doi/abs/10.1080/15427560.2010.483186.
    \618\ See, e.g., Tversky Kahneman Article, supra note 580, on
the importance of framing.
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x. Other Benefits and Costs to Investors
    As indicated in the 917 Financial Literacy Study, retail investors
consider the proposed disclosures in the relationship summary to be
important pieces of information. With respect to content, disclosure
items identified as absolutely essential for retail investors were:
Adviser's fees (76%), disciplinary history (67%), adviser's conflicts
of interest (53%), and adviser's methodology in providing advice (51%).
Approximately 54% of investors also believe that disclosures that
provided comparative adviser information would be useful. In light of
this evidence, the Commission preliminarily believes the disclosure
would provide valuable information to retail investors and potentially
encourage further information gathering by retail investors that assist
them in making an informed choice of what type of account matches their
preferences and expectations.\619\
---------------------------------------------------------------------------

    \619\ Although the 917 Financial Literacy Study indicated that
nearly 90% of survey participants believed that certain disclosures
would have been helpful to have in advance of their selection of
their current adviser, under the current proposal, firms may and are
highly encouraged, though not required, to deliver the relationship
summary in advance of the time a retail investor enters into an
advisory contract with an investment adviser or engages the services
of a broker-dealer. Firms would be required to file the relationship
summary with the Commission and the disclosure would be made
available on public websites of broker-dealers and investment
advisers, which indicates that prospective investors could have
access to a given firm's relationship summary in advance of initial
contact with the firm or its financial professionals. In general,
however, the Commission preliminarily anticipates that most
prospective retail investors would receive the relationship summary
at the time that they meet with a financial professional to consider
entering into an agreement or engaging services.

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

    By providing specified disclosures in an abbreviated and simplified
format, the proposed relationship summary could also improve the
effectiveness of the communication between investors and investment
advisers or broker-dealers. A more effective communication may enable
retail investors to more quickly reach an understanding of what type of
firm and financial professional or type of account offered by the
broker-dealer or the investment adviser best matches their preferences.
As a result, search costs may be reduced as retail investors may need
to contact fewer broker-dealers or investment advisers and financial
professionals given that they have access to information about those
firms or financial professionals.\620\ The inclusion of key questions
as part of the relationship summary also could serve to reduce search
costs as well as the potential for mismatched expectations borne by
retail investors if such questions foster greater discussion about the
services, costs and fees, and possible conflicts associated with
broker-dealer and investment adviser business models.
---------------------------------------------------------------------------

    \620\ Insofar as retail customers may also search for other
providers of financial advice, such as insurance companies or banks
and trust companies, the reduction in search costs obtainable from
the relationship summary would be lower.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed
relationship summary could benefit not only the existing and
prospective customers and clients of broker-dealers and investment
advisers but also the public more broadly. First, recipients of the
relationship summary, to the extent they discuss investing in general,
may discuss the topics covered in the summary with family and friends
and in the process increase the degree of public awareness about the
issues discussed in the disclosure. Second, some prospective retail
investors could access the relationship summary independently through
the company website or the Commission's website.
    The proposed relationship summary may also impose some additional
costs on retail investors. As described more fully in the section that
follows, brokers-dealers and investment advisers will bear compliance
costs associated with the production and dissemination of the
relationship summary. As a result of such increased costs, some firms
or financial professionals may transfer retail investors from
potentially lower cost transaction-based accounts to higher cost asset-
based fee advisory accounts, if the firm or the financial professional
is dually registered.
    In addition to these compliance burdens which may indirectly be
borne by retail investors, the disclosures themselves may impose
certain indirect costs on retail investors. For example, since the
proposed disclosures in the relationship summary are general and
contain prescribed language in many parts, they could steer retail
investor attention away from some specific and potentially important
characteristics of the business practices of the firm or the financial
professional. This potential cost is likely to be mitigated to the
extent the required Additional Information section employs layered
disclosure and the Key Questions encourage more personalized
information gathering on part of the retail investors.
b. Broker-Dealers and Investment Advisers
    The proposed disclosure requirements would impose direct costs on
broker-dealers and investment advisers, including costs associated with
delivery, filing, preparation, and firm-wide implementation of the
relationship summary, as well as training and monitoring for
compliance.\621\
---------------------------------------------------------------------------

    \621\ See infra Section V.A. for estimates of some of these
compliance costs for purposes of the Paperwork Reduction Act.
---------------------------------------------------------------------------

    With respect to initial delivery, the relationship summary would
need to be provided to retail investors \622\ in the case of an
investment adviser, before or at the time the firm enters into an
advisory agreement or, in the case of a broker-dealer, before or at the
time the retail investor first engages the firm's services. A dual
registrant should deliver the relationship summary at the earlier of
entering into an investment advisory agreement with the retail investor
or the retail investor engaging the firm's services. Firms would be
permitted to deliver the relationship summary (including updates)
electronically, consistent with prior Commission guidance.\623\ Firms
would also be required to post their relationship summaries on their
websites in a way that is easy for retail investors to find, if they
maintain a public website. Firms that do not maintain a website would
be required to include in their relationship summaries a toll-free
number for investors to call to obtain documents. In addition, firms
would be required to provide a relationship summary to an existing
client or customer who is a retail investor before or at the time a new
account is opened or changes are made to the retail investor's
account(s) that would materially change the nature and scope of the
firm's relationship with the retail investor. Firms also would be
required to implement a one-time delivery of the relationship summary
to all existing retail investors within 30 days after the date the firm
is first required to file its relationship summary with the
Commission.\624\
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    \622\ In addition to the firm's delivery requirements, firms
would also file their relationship summary with the Commission, to
be publicly available. See supra Section II.C.1.
    \623\ See supra Section II.C.2.
    \624\ Currently, investment advisers have approximately 29
million non-high net worth individual clients and 5 million high net
worth individual clients, and the total number of individual clients
of investment advisers has increased by 10 million since 2012.
Therefore, investment advisers would need to deliver relationship
summaries to approximately 35 million existing retail clients, and
on average, would expect approximately 2.5 million new clients per
year. Item 5.D of Form ADV. Although the Commission is unable to
estimate the number of broker-dealer retail customers, we could
assume that the number of relationship summaries for broker-dealer
customers would be at least as many, if not more, than what would
have to be delivered for investment advisers.
---------------------------------------------------------------------------

    Regardless of the method of delivery (e.g., paper or electronic
delivery) firms would incur costs associated with delivering the
relationship summary to retail investors. Such flexibility in the
method of delivery, while being consistent with Commission guidance,
could increase efficiency by allowing a firm to communicate with retail
investors in the same medium by which it typically communicates other
information. Further, firms could reduce costs by utilizing
technologies to deliver information to retail investors at lower costs
than they may face with paper delivery.\625\ While we recognize that
some firms are likely to use electronic delivery methods, and that
these methods may be lower cost than paper delivery, some firms may
still produce paper versions of the relationship

summary, particularly if they have some retail investors that prefer
delivery of disclosure in this method, or do not have access to the
Internet, or if firms are delivering the relationship summary in the
same format alongside other deliverables, such as Form ADV or account
statements. Firms would also incur costs of posting the relationship
summary on their websites and filing the summary with the Commission.
---------------------------------------------------------------------------

    \625\ Firms would be required to create and maintain records of
deliveries of the relationship summary. See supra Section II.E. See
supra Section II.E (discussing recordkeeping requirements relating
to the relationship summary). If choosing electronic delivery, firms
would have compliance costs in providing notice to retail investors
that the relationship summary would be available electronically. See
supra Section II.C.2 (discussing elements of Commission guidance
about electronic delivery of certain documents).
---------------------------------------------------------------------------

    Beyond costs associated with delivery of the relationship summary
to retail investors, firms would be required to prepare the
relationship summary. The Commission preliminarily believes, however,
that these costs would be limited for several reasons. First, the
relationship summary is concise (limited to four pages in length or the
equivalent length for electronic disclosure), and would contain a
mandated set and sequence of topic areas, with much of the language to
be prescribed, thus limiting the time required to prepare the
disclosure. Second, the relationship summary will be uniform across
retail investors and would not be customized or personalized to
potential investors. Finally, the relationship summary would contain
some standardized elements across investment advisers and broker-
dealers, allowing for potential economies of scale for entities that
may have subsidiaries that would also be required to produce the
disclosure.
    Further to the costs of preparing the relationship summary, we
consider the implication of the disclosure requirements attributable to
the DOL rules and exemptions, including the DOL's BIC Exemption, and
the potential effects of those disclosures relative to the relationship
summary for broker-dealers and investment advisers. The conditions of
the DOL rules and exemptions, including the BIC Exemption, discussed
above in the baseline section, are limited to retirement accounts.
Although some firms may have voluntarily adopted disclosure
requirements of the BIC Exemption for non-retirement accounts, the
proposed relationship summary would apply to a broader array of
relationships, spanning both retirement and non-retirement accounts for
broker-dealers and investment advisers. To the extent that the
information provided by the relationship summary would be duplicative
of information that would be required by the BIC Exemption (or other
DOL rules and exemptions) and provided to the same group of account
holders that would receive the DOL required disclosures, the overall
benefits of the relationship summary could be reduced. Lastly, to the
extent that some financial firms already have set up procedures and
systems to comply with the DOL disclosure requirements, these firms may
incur lower incremental compliance burdens. The Commission
preliminarily believes, however, that the scope of the disclosure
requirements under DOL rules and exemptions and the systems that firms
would have put in place to accommodate such disclosures are unlikely to
have a significant overlap with the relationship summary. Therefore,
the Commission anticipates that any potential cost savings for firms to
comply with disclosure obligations under DOL rules and exemptions and
the relationship summary are likely to be minimal.
    With respect to preparing and implementing the relationship
summary, firms would also need to expend resources with respect to the
required Key Questions in the relationship summary. Firms would bear
costs of preparing responses the questions from the list and training
their employees on how to respond. Financial professionals need to
spend time to prepare their responses to the questions and to respond
to these questions when asked. As a result, some firm employees or
financial professionals could take away from the time they dedicate to
investigate investment recommendations, which could inadvertently harm
investors if financial professionals divert resources to answering key
questions but reduce their time devoted to arriving at investment
strategies. In this case, the quality of their recommendations could
decline. In both cases, the possible additional costs to firms could be
(partially) transferred to retail investors.
    In addition to the costs associated with preparation, delivery,
filing, and posting on websites of the initial relationship summary,
firms would also bear costs for updating the relationship summary
within 30 days whenever any information becomes materially
inaccurate.\626\ The firm would be required to communicate updated
information to retail investors who are existing customers or clients
of the firm within 30 days whenever any information in the relationship
summary becomes materially inaccurate.\627\ Firms could communicate
this information by delivering the amended relationship summary or by
communicating the information another way to the retail investor. For
example, if an investment adviser communicated a material change to
information contained in its relationship summary to a retail investor
by delivering an amended Form ADV brochure or Form ADV summary of
material changes containing the updated information, this generally
would support a reasonable belief that the information had been
communicated to the retail investor, and the investment adviser
generally would not be required to deliver an updated relationship
summary to that retail investor. This requirement provides firms the
ability to disclose changes without requiring them to duplicate
disclosures and incur additional costs. The updated relationship
summary would also need to be posted prominently to the firm's website
if the firm has one and filed electronically with the Commission. In
addition, firms could also incur some costs to keep records of how the
updated relationship summary or the information in the updated
relationship summary was delivered to retail investors.
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    \626\ Along this line, firms could also incur some costs of
modifying prescribed disclosure per the parameters of Instruction 3.
    \627\ The requirement to communicate updated information to
retail investors, rather than deliver an updated relationship
summary could reduce the effectiveness of the information to the
extent that the communication does not allow retail investors to see
the context in which information was changed.
---------------------------------------------------------------------------

    We anticipate that the compliance costs associated with producing
updates of the relationship summary would be also relatively minor
given that the relationship summary uses largely prescribed language
and updates of the relationship summary, which are only required for
material changes, are expected to be infrequent. As a result, the costs
of such updates are expected to be small relative to the costs
associated with the initial production of the disclosure. Further,
annual costs associated with communications regarding updates to the
relationship summary are anticipated to be lower than the costs of the
initial delivery to existing retail investors to the extent the
frequency of updates is low or the firm communicates the updates
through other ways than formal delivery. The Commission anticipates
that some of the costs associated with preparation, delivery, filing,
website posting, and updates to the relationship summary for an average
broker-dealer or average dual registrant could exceed the costs for the
average investment adviser. As Table 1 and Table 3 indicate, broker-
dealers maintain a larger number of accounts than investment advisers
do; therefore, delivery costs for broker-dealers could exceed those of
investment advisers, if the number of accounts is a good indicator of
the number of retail

investor customers.\628\ Similarly, given that the average dual
registrant has more customer accounts than the average investment
adviser, and that the preparation of relationship summaries for dual
registrants may require more effort than for standalone broker-dealers
or investment advisers, the compliance costs could be larger for these
firms.
---------------------------------------------------------------------------

    \628\ The Commission is unable to obtain from Form BD or FOCUS
data information on broker-dealer numbers of customers, and instead,
is only provided with the number of customer accounts. The number of
customer accounts will exceed the number of customers as a customer
could have multiple accounts at the same broker-dealer.
---------------------------------------------------------------------------

    In addition, unlike investment advisers, which produce Part 2A of
Form ADV, a broker-dealer currently is not required to prepare a
narrative disclosure document for its retail investors, although under
existing antifraud provisions of the Exchange Act, a broker-dealer may
be liable if it does not disclose material information to its retail
investors. Thus, broker-dealers could expend additional time and effort
to aggregate the information required by the relationship summary
relative to investment advisers. As a result, the Commission
preliminarily believes that the investment advisers should be able to
produce the relationship summary at a relatively lower cost than
broker-dealers, given investment advisers' experience with preparing
and distributing Part 2A of Form ADV.\629\
---------------------------------------------------------------------------

    \629\ For example, investment advisers may already have
specialized staff dealing with disclosure issues.
---------------------------------------------------------------------------

    The Commission preliminary believes that compliance costs would
also be different across firms with relatively smaller or larger
numbers of retail investors as customers or clients. For example, to
the extent that developing the relationship summary entails a fixed
cost, firms with a relatively smaller number of retail investors as
customers or clients may be at a disadvantage relative to firms with a
larger number of such customers or clients since the former would
amortize these costs over a smaller retail investor base. Firms with a
relatively larger number of existing retail investors would face higher
costs of initial distribution of the relationship summary compared to
firms with a relatively smaller retail investor base. Further, to the
extent that certain costs associated with preparing different versions
of the proposed relationship summary scale with the number of branches
and associated financial professionals that a firm has, firms with a
relatively larger number of branches and employees may bear higher
costs than firms with a smaller number.
    While the imposed four-page limit is expected to impose nominal
compliance costs on market participants, it could also generate
additional costs for some firms relative to others. For example, the
four-page limit may be more costly for firms that have more complex
business models because it will limit the information they can present
within the relationship summary.\630\ For example, a firm with a
disciplinary history that provides exceptionally good customer service
could be at a disadvantage compared to other firms with no disciplinary
history because the relationship disclosure may not summarize relevant
information about the quality of customer service or the full scope of
services offered by the firm.
---------------------------------------------------------------------------

    \630\ Complexity is not necessarily linked to size--for example,
there are large, simple firms and small, complex firms.
---------------------------------------------------------------------------

    Based on the estimates provided in Section V.A for Paperwork
Reduction Act purposes, the average cost burden for an investment
adviser to prepare the proposed Form CRS for the first time is
estimated to range between approximately $1,300 and $3,400, depending
on the extent to which external help is used.\631\ The estimated
aggregate combined internal and external costs to investment advisers
industry-wide for initially preparing and filing the relationship
summary would be approximately $22 million.\632\ Similarly, for broker-
dealers, the average cost to a firm for preparing Form CRS for the
first time is estimated to range between approximately $4,000 and
$6,100, based on the estimate provided in Section V.D.\633\ The
estimated aggregate combined internal and external costs to broker-
dealers industry-wide of initially preparing and filing the
relationship summary would be approximately $15 million.\634\ In terms
of the initial cost of delivering the relationship summary to current
retail investors, we estimate that the cost to existing and newly
registered investment advisers would be approximately $43.4 million in
aggregate, or approximately $5,350 per adviser.\635\ For broker-
dealers, the estimated initial cost of delivering the relationship
summary to current retail investors would be approximately $121.5
million in aggregate, or approximately $42,500 per broker-dealer.\636\
For both investment advisers and broker-dealers, the estimated annual
costs of the requirement to deliver the relationship summary before or
at the time a new account is opened, or changes are made to the retail
investor's account(s) that would materially change the nature and scope
of the firm's relationship with the retail investor, is approximately
10% of the respective estimated costs of the initial delivery to
existing retail investors.\637\
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    \631\ The lower end estimate is based on the assessment that,
without additional external help, it will take an average investment
adviser 5 hours to prepare the relationship summary for the first
time, see infra Section V.A.2.a. We assume that performance of this
function will be equally allocated between a senior compliance
examiner and a compliance manager at a cost of $229 and $298 per
hour, (see infra note 743 for how we arrived at these costs). Thus,
the cost for one investment adviser to produce the relationship
summary for the first time is estimated at $1,317 (2.5 hours x $229
+ 2.5 hours x $298 = $1,317) if no external help is needed. In
addition, we estimate that if the investment adviser needs external
help, the average cost to an investment adviser for the most
expensive type of such help (i.e., compliance consulting services)
would be $2,109, see infra note 732, which brings the total cost to
$3,426.
    \632\ See infra Sections V.A.2.a and V.A.2.b for estimates of
aggregate internal and external costs, respectively, of the initial
preparation and filing of the relationship summary.
    \633\ The lower end estimate is based on the assessment that,
without additional external help, it will take an average broker-
dealer 15 hours to prepare the relationship summary for the first
time, see infra Section V.D.2.a. We assume that performance of this
function will be equally allocated between a senior compliance
examiner and compliance manager at a cost of $229 and $298 per hour,
respectively (see infra note 743 for how we arrived at these costs).
Thus, the cost for one broker-dealer to produce the relationship
summary for the first time is estimated a $3,953 (7.5 hours x $229 +
7.5 hours x $298 = $3,953) if no external help is needed. In
addition, we estimate that if the broker-dealer needs external help,
the average cost to a broker-dealer for the most expensive type of
such help (i.e., compliance consulting services) would be $2,109,
see infra note 826, which brings the total cost to $6,062.
    \634\ See infra Sections V.D.2.a and V.D.2.b for estimates of
aggregate internal and external costs, respectively, of the initial
preparation and filing of the relationship summary.
    \635\ See infra Section V.C.2.b.i for the estimate of costs
investment advisers would incur to deliver the relationship summary
to their existing clients. Note that the analysis includes
investment advisers that are dual registrants.
    \636\ See infra Section V.D.2.d.i for the estimate of costs
investment advisers would incur to deliver the relationship summary
to their existing clients. Note that thee analysis includes broker-
dealers that are dual registrants.
    \637\ See infra Section V.C.2.b.ii for the estimate of these
costs for investment advisers and infra Section V.D.2.d.ii for the
analysis of these costs for broker-dealers.
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    Finally, the Commission believes that the proposed relationship
summary would bring tangible benefits to many broker-dealers and
investment advisers. Although the possibility of mismatched
expectations for retail investors and their choice of financial firm or
professional generally are most costly to the retail investors, such
mismatch also imposes costs on broker-dealers and investment advisers.
For instance, some investors who have mismatched their

expectations of a financial services provider with the type of provider
they have engaged may lodge complaints with the SEC or FINRA for
perceived misconduct by their financial professional without
understanding the nature of their relationship (e.g., an investor may
file a complaint of discretionary trading in an investment advisory
account because they did not understand the nature of the services for
which they contracted). These complaints are costly to firms and
financial professionals, and the Commission preliminarily believes that
the relationship summary could alleviate search costs for investors and
the likelihood of mismatch between investor expectations and their
choice of firm or financial professional.
    With respect to particular elements of the relationship summary,
firms with relatively no currently reportable legal and disciplinary
disclosures could benefit directly from the reporting in the
relationship summary because the reporting would make these
characteristics more salient for retail investors by prompting
investors to research disciplinary history of firms with currently
reportable legal and disciplinary disclosures. To the extent that
including disciplinary history information in the relationship summary
increases the propensity of retail investors to consider this
information when selecting firms and financial professionals, it could
also ultimately increase the cost of misconduct for firms and financial
professionals (for example, by making it more difficult to attract
retail investors), which would make it more likely that firms take
disciplinary information into account when making employment choices,
thereby potentially raising the overall quality of their workforce. The
relationship summary could further exhibit some positive long-term
effects on the markets for broker-dealers and investment advisers and
we elaborate on these long-term effects in greater detail in the next
subsection.
3. Impact on Efficiency, Competition, and Capital Formation
    In addition to the specific benefits and costs discussed in the
previous section, the Commission expects that the proposed disclosure
could cause some broader long-term effects on the market for financial
advice. Below, we elaborate on these possible effects, including a
discussion of their impact on efficiency, competition, and capital
formation.
    The primary long-term effect of the disclosure on the market is
that it could enhance the competitiveness of the broker-dealer and
investment adviser markets. The increased transparency with respect to
the nature of the relationship between broker-dealers or investment
advisers and their retail investors may allow retail investors to
better evaluate their firms and financial professionals as well as the
options for financial services that are advertised by them, which may
increase the overall level of retail investor understanding in the
market. When retail investor understanding increases, the degree of
competitiveness of the financial services industry may also increase
because retail investors could better assess the types of services
available in the market. Market competitiveness could be further
enhanced by the fact that, by prompting investors to understand better
and obtain more information on the services provided as well as the
types of fees and costs associated with such services, the relationship
summary may reduce search costs for retail investors associated with
acquiring this information, thus allowing them to more readily identify
less expensive services that match their preferences and expectations
for financial services. The relationship summary also could cause
additional competition around conflicts of interest, resulting in some
firms changing their practices to decrease conflicts. Proposed
Regulation Best Interest also requires broker-dealers to disclose all
material facts relating to the scope and terms of the relationship, and
all material conflicts of interest associated with the
recommendation.\638\ The Commission preliminarily believes that the
relationship summary, which draws investor awareness to potential
conflicts of interest at the outset of the relationship with a firm or
financial professional, would address similar concerns related to the
material facts associated with the scope and terms of the relationship
as required by proposed Regulation Best Interest. Relative to the
disclosures required by proposed Regulation Best Interest, the
relationship summary conflicts of interest disclosures apply not only
to broker-dealers and dually-registered firms, but also to investment
advisers.
---------------------------------------------------------------------------

    \638\ Further, proposed Regulation Best Interest would establish
policies and procedures to identify and at a minimum disclose or
mitigate material conflicts of interest associated with such
recommendations, as well as policies and procedures to identify,
disclose and mitigate or eliminate material conflicts of interest
arising from financial incentives associated with such
recommendations.
---------------------------------------------------------------------------

    Increased competitiveness in the market for financial services
could have ancillary effects as well, including reduced pricing power
for firms and incentives for firms to innovate products and services.
Reduced pricing power, as a result of increased competitiveness, could
benefit retail investors through lower fees, effectively redistributing
value from holders of financial firm equity to their retail
investors.\639\ We note, however, that this effect could be mitigated
by the possibility that people may still be willing to pay higher
prices for other reasons, including firm reputation. Competition also
provides incentives for firms to develop and innovate. Additional
competition among financial services firms could provide incentives for
broker-dealers and investment advisers to seek alternative ways to
generate profits. In the process, firms could develop new and better
ways of providing services to retail investors, for example, by
utilizing recent developments in information technologies to deliver
information to retail investors at lower cost. In this way, innovation
could thus improve the satisfaction of retail investors and the
profitability of firms in the financial services provider market.
---------------------------------------------------------------------------

    \639\ See Jean Tirole, The Theory Of Industrial Organization,
M.I.T. Press (1989).
---------------------------------------------------------------------------

    Another potential positive effect of the relationship summary is
that, by reporting whether a firm or financial professional has
currently reportable legal or disciplinary events, the relationship
summary could prompt retail investors to seek out disciplinary
information on their current and prospective firms and financial
professionals and take that information into account when considering
whom to engage for financial services. In this respect, the proposed
relationship summary may also enhance competition if, for example,
firms and financial professionals with better disciplinary records
outcompete those with worse records. We note, however, that reporting
whether a firm or financial professional has currently reportable legal
or disciplinary events may also bias firms toward hiring firms or
financial professionals with fewer years of experience (i.e., fewer
opportunities for customer complaints) and against hiring experienced
financial professionals with some (minor) customer complaints. The
expected economic impact of the above effect across small and large
firms, however, is generally unclear. For investment advisers and
broker-dealers, reportable disciplinary events are less common for
smaller firms than for larger firms.\640\
---------------------------------------------------------------------------

    \640\ For example, while only 10% of registered investment
advisers with less than $1 million of AUM disclose at least one
disciplinary action as of January 1, 2018, 66% of registered
investment advisers with more than $50 billion of AUM disclosed at
least one disciplinary action that year. Form ADV. Similarly, while
89% of broker-dealers with less than $1 million in total assets
disclose at least one disciplinary action as of January 1, 2018,
100% of broker-dealers with more than $50 billion total assets
disclosed at least one disciplinary action that year. Form BD.

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

    However, in the market for financial services between investment
advisers and broker-dealers, disclosing the existence of currently
reportable legal and disciplinary events in the relationship summary
may confer a small competitive advantage for investment advisers
because broker-dealers are more likely to have to report that they have
a disciplinary history due to broader broker-dealer disclosure
obligations.\641\ They are also more likely to report if they have more
disciplinary issues. Reporting from Form BD with respect to broker-
dealer disclosures of disciplinary actions taken by any regulatory
agency or SRO shows that 308 (84%) out of 366 dual-registered broker-
dealers disclosed a disciplinary action. By contrast, 1,650 (47%) out
of 3,475 standalone broker-dealers have a disclosed disciplinary
action. For investment advisers, Form ADV requires disclosures of any
disciplinary actions taken in the past ten years. 289 (79%) out of 366
dual-registered investment advisers disclosed a disciplinary action. A
much lower fraction, 1,732 (14%) of 12,293, standalone investment
advisers disclosed a disciplinary action.\642\ The fact that broker-
dealers have relatively more reportable legal and disciplinary events
than investment advisers may cause retail investors to engage
investment advisers rather than broker-dealers, thus creating a
competitive advantage for some investment advisers.
---------------------------------------------------------------------------

    \641\ See supra notes 251, 253--255 and accompanying text.
    \642\ Source: Items 11C, 11D, and 11E of Form BD and Items
11.C., 11.D. and 11.E. of Form ADV. Form BD asks if the SEC, CFTC,
other federal, state, or foreign regulatory agency, or a self-
regulatory organization have ever found the applicant broker-dealer
or control affiliate to have (1) made a false statement or omission,
(2) been involved in a violation of its regulations or statues, (3)
been a cause of an investment related business having its
authorization to do business denied, suspended, revoked, or
restricted, or (4) imposed a civil money penalty or cease and desist
order against the applicant or control affiliate. Likewise, Form ADV
asks similar questions of registered investment advisers and
advisory affiliates.
---------------------------------------------------------------------------

    Although the proposed relationship summary applies to SEC-
registered broker-dealers and SEC-registered investment advisers, it
could exhibit some spillover effects for other categories of firms not
affected by the proposal such as investment advisers not registered
with the SEC, bank trust departments, and others. In particular, the
relationship summary could change the size of the broker-dealer and
investment adviser markets--relative to each other, as well as relative
to other markets. To the extent the relationship summary reduces retail
investors' confusion and makes it easier for them to choose a
relationship in line with their preferences and expectations, the
Commission expects that this could attract new retail investors to
these markets, coming from firms in other markets. Firms' current
retail investors also may consider switching to a different type of
firm if the relationship summary makes the different services provided
and the fees and costs of investment advisory and brokerage services
more prominent. The exact extent and direction of substitution between
brokerage and advisory services is hard to predict and depends on the
nature of the current mismatch between retail investor preferences and
expectations and the type of services for which they have contracted.
    The proposed relationship summary may also benefit financial
markets more broadly. Recent survey evidence suggests that 60% of all
American households have sought advice from a financial
professional.\643\ Despite their prevalence and importance, however,
financial professionals are often perceived as dishonest and
consistently rank among the least trustworthy professionals.\644\ This
perception has been partly shaped by highly publicized scandals that
have affected the industry over the past decade. Systematic mistrust
may suppress household stock market participation below the optimal
threshold predicted by academic investment theory, as documented in
household survey based studies.\645\ The Commission preliminarily
believes that the increased transparency of the existing business
practices of financial professionals could raise the level of investor
trust in the market. The enhanced trust could promote retail investor
participation in capital markets which could increase the availability
of funds for businesses. Depending on the magnitude of the effect,
greater availability of funds could lower firms' cost of capital,
allowing firms to accumulate more capital over time.
---------------------------------------------------------------------------

    \643\ See supra note 541. Survey of Consumer Finances, 2016. The
percentage aggregates all respondents indicating that they use at
least one of the following sources in making saving and investment
decisions--brokers, financial planners, accountants, lawyers, or
bankers. 26% of the respondents indicate that they have used brokers
or financial planners.
    \644\ See Edelman Trust Barometer, 2015 Edleman Trust Barometer
Executive Summary (2015), available at https://www.edelman.com/2015-edelman-trust-barometer/; Anna Prior, Brokers are Trusted Less than
Uber Drivers, Survey Finds, Wall Street Journal (Jul. 28, 2015),
available at https://www.wsj.com/articles/brokers-are-trusted-less-than-uber-drivers-survey-finds-1438081201; Luigi Zingales, Does
Finance Benefit Society, Journal of Finance 70, 1327-1363 (Jan.
2015).
    \645\ See, e.g., Luigi Guiso, Paola Sapienza & Luigi Zingales,
Trusting in the Stock Market, The Journal of Finance, Vol. 63, No.
6, 2557-2600 (2012); and J. Campbell, Household Finance, The Journal
of Finance, Vol. 61, No. 4, 1553-1604 (2006) (``Campbell Article'').
---------------------------------------------------------------------------

    We note a possible negative effect on the trust of some retail
investors due to the disclosure on the relationship summary that a firm
or financial professional has currently reportable legal or
disciplinary events. The decrease in the trust levels of some retail
investors, however, could also benefit these investors by bringing
their expectations and perceptions in line with their choice of a firm
or financial professional.\646\
---------------------------------------------------------------------------

    \646\ See Jeremy Ko, Economics Note: Investor Confidence (Oct.
2017), available at https://www.sec.gov/files/investor_confidence_noteOct2017.pdf.
---------------------------------------------------------------------------

    Another possible long-term effect of the relationship summary is
that it could decrease the prevalence of third-party selling
concessions in the market by requiring broker-dealers and dual
registrants to include prescribed disclosure about indirect fees
associated with investments that compensate the broker-dealer,
including mutual fund loads. Currently, selling concessions constitute
a significant part of the compensation of broker-dealers selling mutual
fund products.\647\ For example, a mutual fund may provide a selling
concession, in the form of a sales charge, some portion of which could
be remitted to the broker-dealer that recommended the product.
---------------------------------------------------------------------------

    \647\ See supra Table 2, Section IV.A.1.a.
---------------------------------------------------------------------------

    Table 2, Panel A also indicates that selling concessions constitute
a larger fraction of total revenue (commissions, fees, and sales of IC
shares) for smaller broker-dealers--for example, selling concessions as
a fraction of revenues represent around 20% for broker-dealers with
total assets less than $1 million and less than 4% for broker-dealers
with total assets in excess of $50 billion. To compensate for the
potential loss of concession-based revenue, broker-dealers could try to
switch customers to advisory accounts. As noted above, however, if the
proposed disclosure also increases the competitiveness in the broker-
dealer and investment adviser markets the increased competitiveness
would create some downward price pressure in the market.

4. Alternatives to the Proposed Relationship Summary
    This section highlights alternatives to the relationship summary
concerning an amendment of existing Forms BD and ADV for broker-dealers
and investment advisers, respectively; the form and format of the
relationship summary; extensiveness of disclosure; delivery; and
communicating information about the updated relationship summary.
a. Amendment to Existing Disclosures
    As proposed, the relationship summary would be a new, standalone
disclosure produced by broker-dealers and investment advisers, in
addition to the other required information disclosed by broker-dealers
and investment advisers. As an alternative, the Commission could
consider incorporating the relationship summary information into
existing disclosures.
    For example, Part 2A of Form ADV currently has 18 mandatory
reporting elements, produced as a narrative discussion, as part of the
disclosure ``brochure'' provided to prospective retail investors
initially and to existing retail investors annually. Instead of
requiring investment advisers to produce a completely new disclosure as
a separate Form CRS, the Commission could instead make an amendment to
Part 2A of Form ADV to require a brief summary at the beginning of the
brochure in addition to the existing narrative elements, or to change
certain of the disclosure requirements to reduce or eliminate
redundancy. Similarly, broker-dealers could be required to deliver
longer narrative disclosure to their retail investors with specified
elements. Such disclosure could also be required as part of Form BD or
a standalone requirement.\648\ For example, the instructions to Form BD
contain a section on the explanation of terms which could be extended
to include basic (registrant-specific) information on the business
practices of the registrant.
---------------------------------------------------------------------------

    \648\ We note, however, that Form BD is a registration/
application form (rather than an existing brochure-type disclosure
form).
---------------------------------------------------------------------------

    Although modifying existing disclosure and reporting in these ways
could provide the same information to retail investors as the proposed
relationship summary, the Commission believes that these approaches
would be less suited for the objective of this disclosure, which is to
provide a short, simple overview. The proposed relationship summary
would provide disclosure in a standardized, simplified manner, that
would allow retail investors not only to compare information within a
category (e.g., two investment advisers), but also across categories
(e.g., investment advisers and broker-dealers). Further, the
relationship summary would be designed to be easily comprehensible by
retail investors, relying on short, easy-to-read disclosure that would
provide an overview of information about the firm and its financial
professionals to retail investors when choosing a firm and account
type. We believe that the proposed relationship summary would benefit
retail investors by highlighting succinct information that is relevant
to a decision to select a firm, financial professional, or account type
and services, at the time such decisions are made, and relying on
layered disclosure to provide additional detail.
b. Form and Format of the Relationship Summary
    The Commission is proposing to require broker-dealers and
investment advisers to create and deliver a short relationship summary
to retail investors that would highlight specified information under
prescribed headings in the same order to facilitate comparability. The
relationship summary would be limited in length and would contain a mix
of prescribed and firm-specific language. The proposal does not specify
a single format for filing the disclosure.
    The Commission could require the relationship summary be filed with
the Commission in a specified format, such as an text-searchable PDF
file or in some other format, for example, an unstructured PDF or HTML,
structured PDF, a web-fillable form, XML, XBRL or Inline XBRL. Further
to this alternative, the Commission could require that the relationship
summary information be filed in a structured format to facilitate
validation, aggregation and comparison of disclosures, and the
Commission could then make the data available on IARD and EDGAR.
Structured format, such as XML, can enable the automatic generation of
unstructured formats such as PDF, HTML, and others to meet the needs of
those users who would prefer a paper-oriented layout.
    As an alternative to the largely prescribed language for the
relationship summaries, the Commission could instead allow broker-
dealers and investment advisers to construct bespoke disclosure, while
providing guidance to firms on the elements of the relationship
disclosure that are required to be included. Although this disclosure
would allow firms to tailor the discussion of the nature of the
business, fees and costs, conflicts of interest, and disciplinary
history specifically to their business model, this approach would
likely be more costly to retail investors, as it would likely diminish
the usefulness of a concise, simplified disclosure that is capable of
being used by retail investors to understand firm types. Longer firm-
specific disclosures could also increase the search costs for retail
investors which could ultimately result in worse choices by lowering
investor ability and incentives to screen a large number of firms.
Higher search costs for investors could also lower the competitiveness
of the market by allowing some firms with lower-quality services to
maintain customers and sustain market share, even if better choices are
available to retail investors. As discussed above in Section III.B,
simplification of disclosures, in terms of size, presentation, and
readability, allows for ease of processing of information, while
standardization of the content would facilitate identification of
information most useful to a retail investor. Finally, lengthier
bespoke disclosure would be also costlier for firms to produce. As
another alternative, the Commission could have required the
relationship summaries to include only prescribed wording. However, the
Commission believes that a mix of prescribed and firm-drafted language
provides both information that is useful for retail investors in
comparing different firms along with some flexibility for firms to
determine how best to communicate the information about their
particular practices to retail investors.
c. Extensiveness of Disclosure
    As currently proposed, the relationship summary would include high-
level information on (i) introduction; (ii) the relationships and
services provided in the firm's advisory accounts and brokerage
accounts; (iii) the standard of conduct applicable to those services;
(iv) the fees and costs that retail investors will pay, (v) comparison
to other account types; (vi) specified conflicts of interest; (vii)
where to find additional information, including whether the firm and
its financial professionals currently have reportable legal or
disciplinary events and who to contact about complaints; and (viii) key
questions for retail investors to ask the firm's financial
professional. As an alternative, the Commission could require the
inclusion of additional topics or additional disclosures on one or more
topics proposed to be covered by the relationship summary. These
disclosures could be required as part of the relationship summary or as
separate appendices.

    With respect to the additional topics to be disclosed, the
Commission could request that firms disclose additional information on
their performance, investment style, or other business practices.
Retail investors, however, may become overwhelmed if presented with a
number of very lengthy disclosures, which therefore could bury the
information that is most useful to investors and reduce the
effectiveness of those disclosures.\649\ With respect to the specific
topics of additional information, evaluating the performance,
investment style and business practices of a firm or financial could be
subjective or speculative, and may be more suited for marketing
materials rather than prescribed language in the relationship
summary.\650\ For all these reasons, we believe that these additional
disclosure topics are not appropriate for inclusion in the relationship
summary.
---------------------------------------------------------------------------

    \649\ See also supra note 50 and accompanying text (discussing
comment letters to the 917 Financial Literacy Study regarding the
length of disclosure documents).
    \650\ In terms of performance, studies have shown that investors
take into account information about historic fund performance in
their investment choice; see, e.g., Choi Laibson Article, supra note
567.
---------------------------------------------------------------------------

    Regarding alternatives to the disclosure of fees and costs as
proposed here, the relationship summary could require additional
disclosures on one or more of these topics. For example, the
relationship summary could include the firm's fee schedule, either as
part of the body of the relationship summary or as an attachment.
Alternatively, we could require each relationship summary to include a
personalized fee schedule,\651\ to be created for each retail investor,
detailing the specific fees and costs associated with the retail
investor's account, presented both in dollars and as a percentage of
the value of the retail investor's account. These fee schedules could
also include compensation received by the firm and its financial
professionals related to the account, and the indirect fees that are
payable by the retail investor to others (e.g., mutual fund and
exchange-traded fund fees and expenses). However, ex ante identifying
possible fee schedules for investors at the outset of a relationship as
opposed to at the time of the transaction could impose costs to both
investors and firms. For example, firms might need to outline a long
list of possible transactions and the associated fee schedules, which
in turn could be confusing to investors.
---------------------------------------------------------------------------

    \651\ One requirement of proposed Regulation Best Interest would
be to provide to investors at the time of or prior to a
recommendation the expected fees and costs, and possibly a fee
schedule, associated with the individual transaction.
---------------------------------------------------------------------------

    We could also require more comprehensive disclosures regarding
conflicts of interest and disciplinary history, including requiring
firms to summarize more or all of their conflicts of interest.\652\ For
example, firms could disclose potential conflicts of interest
associated with execution services, such as those required to be
reported in rule 606 disclosures.\653\
---------------------------------------------------------------------------

    \652\ See supra Section II.B.6 for a discussion of conflicts, or
specific details of conflicts, that would not be required to be
disclosed in the proposed Form CRS.
    \653\ See 17 CFR 242.606 (requiring that broker-dealers make
publicly available a quarterly report on order routing information,
including a discussion of the material aspects of their relationship
with venues executing non-directed orders, including arrangements
for payment for order flow and any profit-sharing arrangement).
---------------------------------------------------------------------------

    We could also require additional details about a firms' and its
financial professionals' disciplinary history. Instead of requiring
firms to disclose whether or not they have currently reportable legal
or disciplinary history, as proposed, we could require firms to
disclose the number of disciplinary events, expressed as a number or as
a percentage of the size of the firm or the number of firm
professionals. We could further differentiate the disclosures by
requiring firms to disclose the existence and numbers of disciplinary
histories within categories of disciplinary history.
    More detailed disclosures about fees, compensation, conflicts and
disciplinary history could help retail investors understand better the
differences between types of accounts, and could facilitate the
decision about the most appropriate account for each retail investor.
As noted above, current disclosures on these topics cover only subsets
of firms and relationships and could take different forms. For example,
firms wishing to make investment recommendations to IRAs and
participants of ERISA-covered plans may be subject to certain
disclosure obligations.\654\ This disclosure, however, does not apply
to non-retirement accounts. Investment advisers also prepare a Form ADV
Part 2A narrative brochure but such a retail disclosure document is not
currently required for broker-dealers. As a result, the Commission
preliminary believes that retail investors could benefit from the
proposed relationship summary given its wide coverage, delivery method,
and design.
---------------------------------------------------------------------------

    \654\ See supra Section IV.A.1.c (discussing disclosure
obligations under DOL rules and exemptions).
---------------------------------------------------------------------------

    In particular, the disclosures about types of fees and costs
included in the relationship summary could help retail investors
understand better the types of fees that they will pay and how those
types of fees and costs affect their accounts. As discussed in the
baseline, the 917 Financial Literacy Study highlighted that
transparency and disclosure about fees charged by financial
intermediaries was one of the most essential elements that investors
would consider in making their decision about which financial
professional to choose.\655\
---------------------------------------------------------------------------

    \655\ See supra note 20.
---------------------------------------------------------------------------

    Similarly, the information provided about conflicts of interest in
the relationship summary could help retail investors understand how
such conflicts that might be pertinent to their account. The disclosure
about whether the firm or financial professional has currently
reportable legal or disciplinary events could encourage retail
investors to research the extensiveness and nature of the disciplinary
history of a firm, therefore allowing retail investors to further
evaluate firms based on the types of disciplinary events.
    Although additional disclosures on account types, fees and
compensation (including a fee/compensation schedule), conflicts of
interest and disciplinary history could enhance retail investors'
understanding of the accounts that are available to them, there are a
number of additional costs associated with these alternatives. As noted
earlier in the release, extensive empirical evidence suggests that as
documents get lengthier and more complex, readers either stop reading
or read less carefully.\656\ Retail investors, therefore, may become
overwhelmed if presented with lengthy disclosure, which could bury the
information that is most important to investors and reduce the
effectiveness of those disclosures.\657\ Further, the compliance and
production costs of additional disclosure would increase significantly
the overall compliance costs to broker-dealers and registered
investment advisers.
---------------------------------------------------------------------------

    \656\ See, e.g., 917 Financial Literacy Study, supra note 20.
    \657\ See also supra note 50 and accompanying text (discussing
comment letters to the 917 Financial Literacy Study regarding the
length of disclosure documents).
---------------------------------------------------------------------------

    As another alternative, the Commission could require a shorter
relationship summary, limited to one page (or equivalent limit for
electronic format) that would highlight important topics for retail
investors and/or including only key questions for retail investors to
ask. This alternative relationship summary would be highly readable,
with prescribed formatting,

and could highlight the differences between brokerage and advisory
services and fees, and flag for retail investors the existence of
firms' and financial professionals' conflicts of interest without
discussing any specific conflicts. However, the one-page relationship
summary would be the same or very similar across firms, and therefore
likely would not facilitate detailed comparison across firms or provide
enough information to highlight the differences for most retail
investors.
    We alternatively could require firms to create separate
relationship summaries for each account type they offer to retail
investors, and require firms to provide a retail investor only the
relationship summary for the service being offered.\658\ This would
result in more detailed disclosures on specific account types, and
would potentially provide retail investors with more relevant
information about account types that they are interested in reviewing
(and less extraneous information about account types that they are not
interested in reviewing). However, providing such focused relationship
summaries could decrease comparability across account types, as the
relationship summary would not present, in one place, the differences
in accounts and services offered.\659\ In addition, this would result
in more costs to firms with multiple advisory and brokerage services,
as they would be required to prepare several relationship summaries,
although they may also have the resources to do this. The Commission
preliminarily believes that, as a tool for layered disclosure, the
relationship summary as proposed facilitates retail investors' ability
to obtain more detailed disclosures on account types by encouraging
retail investors to ask questions and request more information.
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    \658\ See Comment letter of Fidelity responding to FINRA's
Regulatory Notice 10-54 (Dec. 27, 2010), available at http://www.finra.org/sites/default/files/NoticeComment/p122723.pdf.
    \659\ We note that firms with multiple account types within
brokerage or advisory would not have the flexibility to describe/
distinguish the different account types (e.g., a brokerage firm that
offers a range of accounts--from completely self-directed to mutual-
fund only to full-service).
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d. Delivery
    As currently proposed, firms would be required to deliver the
relationship summary before or at the time an investment adviser enters
into an advisory agreement with a retail investor, or, for broker-
dealers, before or at the time the retail investor first engages the
firm's services. Dual registrants would be required to deliver the
relationship summary at the earlier of entering into an investment
advisory agreement with a retail investor or the retail investor
engaging the firm's services. As with other disclosure, a firm would be
permitted to deliver the relationship summary (including updates)
electronically, consistent with the Commission's guidance regarding
electronic delivery. In addition, firms would be required to implement
a one-time delivery of the relationship summary to existing retail
investors as a transition requirement. We are also proposing a
requirement for firms to post their relationship summaries on their
websites in a way that is easy for retail investors to find, if they
maintain a public website. Firms that do not maintain a website would
be required to include in their relationship summaries a toll-free
number for investors to call to obtain documents.
    In addition, a firm would be required to provide a relationship
summary to an existing client or customer who is a retail investor
before or at the time a new account is opened or changes are made to
the retail investor's account(s) that would materially change the
nature and scope of the firm's relationship with the retail investor,
as described in more detail in Section III.C.2 above. A firm would also
be required to deliver the relationship summary to a retail investor
within 30 days upon request. Furthermore, firms would be required to
file current relationship summaries with the Commission, which would be
made publicly available, and would be required to post a current
version of their relationship summary on their website, if they
maintain one.
    As an alternative regarding delivery, the Commission could require
that the relationship summary would only be available through
electronic delivery, such as an email attachment, an email with the
full text of the relationship summary in the body of the text, or an
email with a hyperlink to the firm's website. Although alternatives
relying exclusively on electronic delivery could reduce costs
associated with the production of those disclosures, the proposed
approach would give the potential benefits of providing information to
retail investors in a timely fashion in order to help retail investors
select a financial professional or firm, while recognizing the
proliferation of the various means of communications, electronic or
otherwise, available to firms and retail investors. Our approach also
recognizes that some retail investors may not have Internet access or
may prefer delivery in paper.
    The Commission could have also eliminated the requirement for firms
to post the relationship summary on their websites and file the
disclosure with the Commission. However, we believe that the relatively
minimal cost to firms for posting and filing is outweighed by the
benefit of providing easily accessible information to retail investors
to assist them in deciding among firms and financial professionals.
    Another possibility would have been also not to require a one-time
delivery of the relationship summary to existing retail investors. The
Commission believes that since the information in the relationship
summary is potentially valuable to new investors it would be also
potentially valuable for the existing customers of broker-dealers and
investment advisers. While existing retail investors would face higher
costs to change from an existing financial services provider to a new
one than new potential investors would, most existing investors would
be still able to reevaluate their relationships with their current firm
and investment professionals. Furthermore, there is an inherent cost to
retail investors when the services they receive do not meet their
expectations. To the extent delivery of the relationship summary to
existing retail investors fosters greater understanding and decreases
the mismatch, this could mitigate any costs of changing financial
service providers. Distributing the relationship summary to a larger
group of initial investors further increases the group of individuals
that could become familiar with the disclosure indirectly through
interactions with family and friends.
    As another alternative, the Commission could have proposed only a
delivery requirement for the relationship summary, like Form ADV Part
2B, instead of also requiring that firms file it with the Commission.
As discussed also in Section III.A above, although not requiring the
summaries to be filed with the Commission could reduce the costs to
firms for preparing the document to be filed, the Commission believes
that public access to relationship summaries benefits prospective
retail investors by allowing them to compare firms when deciding
whether to engage a particular firm or financial professional or open
an advisory or brokerage account, particularly if the summaries can be
located on a single point of access. Further, filing the relationship
summary with the Commission provides public access regardless of
whether a particular firm has a website with which to provide public
access to the disclosure.

e. Communicating Updated Information
    As currently proposed, firms would need to update their
relationship summary within 30 days whenever any information in the
relationship summary becomes materially inaccurate. Our proposal would
also require firms to communicate the information in the amended
relationship summary to retail investors who are existing clients or
customers of the firm within 30 days after the updates are required to
be made and without charge. The communication can be made by delivering
the relationship summary or by communicating the information in another
way to the retail investor.\660\ Each firm would also be required to
post the updated relationship summary prominently on its website (if it
has one) and electronically file the current version of the summary
with the Commission.
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    \660\ See supra Section II.C.3.
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    Alternatively, the Commission could require that the relationship
summary also be updated and delivered annually, which would be similar
to the current requirements for investment advisers to provide an
updated ``brochure'' derived from Part 2A of Form ADV to their existing
retail investors both annually and upon any changes to the Item 9 of
Part 2A (disciplinary information). The Commission preliminarily
believes that the benefits of preparing and delivering an annual
relationship summary, regardless of the format of that delivery, would
not outweigh the costs to produce and distribute. As noted earlier, the
Commission anticipates that the terms of the business relationship
between most firms and their retail investors would be relatively
stable over time, except when a new account is opened or a significant
amount of assets is moved from one type of account to another that is
different from the retail investor's existing accounts, or other
changes are made that result in a material change to the nature and
scope of the firm's relationship with the retail investor. As a result,
every new delivery would bring relatively small amount of information
to retail investors.
    We believe that mere public posting of the updated summary would
not itself adequately inform retail investors about material changes to
the relationship summary, and that firms providing communication of
information about relationship summary updates to investors as
described above is therefore necessary.
    Finally, instead of proposing that firms may choose to communicate
information about updated relationship summaries to existing retail
investors instead of delivering an updated relationship summary, the
Commission could have proposed that firms must deliver the updated
relationship summary to each existing retail investor regardless of
whether or not it communicated the information to retail investors in
another way. While delivering the summary would provide retail
investors with the full scope of changes being made to the summary in
the context of existing information, the Commission preliminarily
believes that allowing firms to communicate information about the
updates as well as making the current version of the summary publicly
available, via a firm's website (if the firm has a website) and on the
Commission's website, provides flexibility for firms to utilize
existing communication methods and reduces the costs of delivery on
firms while providing adequate notice to retail investors about the
updates to the relationship summary, as well as access to the updated
summaries.
5. Request for Comments
    The Commission requests comment on all aspects of the economic
analysis, including the analysis of: (i) Potential benefits and costs
and other economic effects; (ii) long-term effects of the proposed
relationship summary on efficiency, competition, and capital formation;
and (iii) reasonable alternatives to the proposed regulations. We also
request comments identifying sources of data and that could assist us
in analyzing the economic consequences of the proposed regulations.
    In addition to our general request for comment on the economic
analysis, we request specific comment on certain aspects of the
proposal:
     Do commenters agree with the overall assessment that the
relationship summary would benefit retail investors and assist them in
making a choice of what type of account matches their preferences? Do
commenters believe there are alternatives to the structure and content
of the relationship summary that we have not considered that could make
it more beneficial to retail investors? Are there any unintended costs
of the relationship summary for retail investors that we have not
considered?
     Do commenters believe that the proposed disclosures about
relationships and services and fees are clear and effective enough? How
would you recommend altering the presentation of these disclosures in
order to increase their effectiveness?
     Do commenters agree the proposed disclosure of the
categories of conflicts of interest would be beneficial to retail
investors? How would you recommend altering the presentation of the
conflicts of interest information so that costs are minimized?
     What additional costs and benefits do you envision with
extending the disclosure of disciplinary history?
     Are there alternative key questions we should consider
recommending that retail investors ask their financial professional?
Are there questions we should exclude, and, if so, why? Do commenters
agree with the concern that there could be potential costs associated
with the list of proposed questions, such as anchoring the attention of
retail investors to the list and thereby reducing the likelihood that
they would explore other potential questions that could be important to
them?
     What costs do commenters anticipate that firms and
financial professionals will incur in implementing and complying with
the proposed Form CRS, both initial and ongoing? Please provide
estimates of the time and cost burdens for preparing, delivering and
filing the proposed form. What costs do commenters expect firms and
financial professionals will incur to prepare answers to the ``Key
Questions to Ask'' in the proposed Form CRS? Please provide estimates
of the time and cost burden for preparing to answer the questions.
     How do commenters anticipate that the benefits and costs
of the proposed rule will be shared between broker-dealers and their
clients; or between investment advisers and their clients?
     Do commenters anticipate that the benefits and costs of
the proposed rule would be different across broker-dealers and
investment advisers? What about dually-registered firms?
     Are retail investors likely to access and download
relationship summaries of broker-dealers through EDGAR and investment
advisers through IAPD?
     Are there other reasonable alternatives that the
Commission should consider? If so, please provide additional
alternatives and how their costs and benefits would compare to the
proposal.

C. Restrictions on the Use of Certain Names and Titles and Required
Disclosures

    As discussed above, several studies suggest that retail investors
may lack financial literacy and are confused about the differences
between broker-

dealers and investment advisers.\661\ Part of this confusion may be
related to the current use of professional names and titles as
indicated by these studies and commenters.\662\ This proposal would
seek to reduce investor confusion related to the use of certain terms
in firm names and professional titles and prevent retail investors from
potentially being misled that their firm or financial professional is
an investment adviser, resulting in investor harm. In particular, our
proposed rule seeks to restrict a broker or dealer, and any natural
person who is an associated person of such broker or dealer, when
communicating with a retail investor, from using as part of its name or
title the words ``adviser'' or ``advisor'' unless such broker or dealer
is registered as an investment adviser under the Advisers Act or with a
state, or such natural person who is an associated person of a broker
or dealer is a supervised person of an investment adviser registered
under section 203 of the Advisers Act or with a state, and such person
provides investment advice on behalf of such investment adviser.\663\
In addition to the restriction on the use of certain names and titles,
we are proposing rules that require both broker-dealers and investment
advisers to prominently disclose their registration status with the
Commission and for their financial professionals to disclose their
association with such firm in all print and electronic retail investor
communications. Dual registrants would be required to disclose both
registration statuses.
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    \661\ See Siegel & Gale Study, supra note 549 and RAND Study,
supra note 5. Although these studies do not limit the types of
financial professionals exclusively to broker-dealers or investment
advisers, the majority of the survey questions focus on differences
between advisory services versus brokerage services.
    \662\ Id. See supra note 4.
    \663\ See section 202(a)(25) of the Advisers Act [15 U.S.C. 80b-
2(a)(25)] defining ``supervised person'' as any partner, officer,
director (or other person occupying a similar status or performing
similar functions), or employee of an investment adviser, or other
person who provides investment advice on behalf of the investment
adviser and is subject to the supervision and control of the
investment adviser.
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    This section provides an analysis of the economic effects of the
proposed rules relative to the baseline, including a discussion of the
benefits and costs to the affected parties and the impact on
efficiency, competition and capital formation. We also discuss
reasonable alternatives to the proposed rules.
1. Broad Economic Considerations
    The economic tradeoffs involved in the choice of names and titles
by firms and financial professionals are complex and affected by a wide
range of factors. In this section, we discuss under what conditions
firm names and financial professionals' titles may convey information
that is important to retail investors when they are searching for a
provider of financial advice, as well as factors that are likely to
matter for firms and financial professionals when choosing their names
and titles. We also discuss some conditions where investor confusion
over the information conveyed by the names and titles chosen by firms
and financial professionals may lead to investor harm.
    We believe that investors fall into a spectrum of knowledge about
the providers in the market for financial advice. On one end of the
spectrum, there are investors who may understand and correctly
distinguish the types of services and standard of conduct provided by
different types of firms and financial professionals. If firms and
financial professionals use names that accurately describe their
regulatory type, these types of investors would understand and expect
that ``broker-dealers,'' or close synonyms thereof, would provide the
services of, and be subjected to the standard of conduct applicable to,
a broker-dealer, while ``investment advisers,'' or similar names and
titles, would provide the services of, and be subject to the standard
of conduct applicable to, an investment adviser. On the other end of
the spectrum there are less knowledgeable investors who do not
understand that there are different types of services that can be
provided by firms or financial professionals, or differing applicable
standards of conduct. These investors may not be able to discern from
the name or title what type of service will be provided by a firm or
financial professional. As a result, these investors may bear costs
associated with their confusion, such as increased time and effort
(``search costs'') to identify the right type of financial
professional,\664\ or harm associated with inadvertently selecting, or
potentially being misled to select, a type of firm and financial
professional that is not consistent with their preferences and
expectations. The harm from a mismatched relationship could be, for
example, a higher-than-expected cost of services or reduced protection
for the investor.
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    \664\ According to the 2009 National Survey Initial Report (see
supra note 275), of the 816 survey respondents that used a financial
professional in the last five years, 56% indicated that when looking
for a financial professional, they met or talked with more than one
professional before making their choice.
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    In addition to confusion over firm names and professional titles,
and what they may represent, some investors may also have confusion
over the type of brokerage, advisory and other services and standard of
conduct that best match their preferences. Retail investors, therefore,
can also be categorized based on whether they know the type of advice
relationship (and associated payment model) that they would prefer,
regardless of whether they understand the names and titles of firms and
professionals. For instance, some investors may know that they prefer
to receive and pay for advice on a per transaction basis, such as that
provided typically by a broker-dealer, while others know they prefer an
ongoing advisory relationship with an asset-based fee model, such as
that typically provided by an investment adviser. On the other hand,
some other investors may only understand that they are seeking
financial advice but do not understand that there are different types
of advice relationships, and different ways to pay for advice, and may
not correctly identify the type of advice relationship that would be
most consistent with their preferences. This dimension of investor
confusion could also lead to investor harm such as increased search
costs, an overall mismatch in the type of advice relationship, or
paying more than expected for services received.
    In principle, firm names and professional titles used by financial
intermediaries, to the extent that names and titles accurately reflect
the financial services provided, may serve as a search tool for some
investors when they initially select which financial professionals to
approach. In particular, for investors that both understand and
correctly interpret company or professional names and titles and also
know the type of investment advice relationship that they prefer, names
and titles of firms and financial professionals that are mainly
associated with one type of financial services could be used as an
initial sorting mechanism that may reduce search costs. For example, to
the extent names and titles accurately reflect the type of firms and
financial professionals, knowledgeable investors that prefer only
brokerage services could lower their search costs by using names and
titles to increase the likelihood they would contact broker-dealers
rather than investment advisers in their search. Similarly,
knowledgeable investors looking to hire an investment adviser would
more easily be able to contact investment advisers and avoid contacting
broker-dealers simply by observing the firm or professional names and
titles. We also note that investors who understand the

differences between broker-dealers and investment advisers generally
are unlikely to face a mismatch in the selection of a financial
professional, and that the names and titles, in this case primarily
serve to reduce search costs.
    Less knowledgeable investors may face confusion over either the
information conveyed by firm or professional names and titles or the
preferred scope of their advice relationship. To the extent that names
or titles used by financial intermediaries accurately reflect services
provided, any reduction in search costs or reduction of the risk of
investors matching with the wrong type of firm and financial
professional will depend on the nature of the investor confusion, as we
discuss in more detail below.
    When selecting firm or professional names and titles, financial
services providers may account for the level of investor understanding
(or confusion). For example, they may be aware that some investors are
informed by the use of particular names and titles, and the
implications for the services provided and applicable standard of
conduct, while other investors may face confusion over the use of
particular names and titles or the type of advice relationship they
seek. The incentives of financial intermediaries are two-fold: (1) They
seek to build their client/customer base; and (2) they desire to reduce
the costs associated with building that client/customer base, such as
the time, effort, and marketing costs incurred in the initial client
acquisition process. Therefore, financial intermediaries would
rationally choose titles that effectively attract the attention of
potential investors, while reducing the likelihood of ``false starts''
with investors that are not the right match (and understand what type
of advice that they seek). For example, if investors that fully
understand the differences between different types of financial
intermediaries are a significant majority of the potential investor
pool, then profit maximizing financial intermediaries would likely
choose names and titles that clearly identify the nature of services
provided and applicable standard of conduct. These knowledgeable
investors will then be able to identify from that choice of name or
title whether the firm or financial professional will meet their
preferred type of investment advice relationship, and therefore, the
unambiguous choice of title by the financial professional both reduces
search costs incurred by these investors and reduces the effort
expended by the financial professionals to build their customer base.
    Continuing the same example, the remainder of the investor pool
would then consist of less knowledgeable investors, which would
represent a small portion of the aggregate investor pool. These
investors, in particular those who are confused about the differences
among firms and financial professionals and what type of investment
advice relationship they should seek, may be unlikely to understand
from names or titles alone how well the financial intermediary would
match their preferences, and therefore, will bear search costs and the
possibility of mismatch even when names and titles provide little
ambiguity for informed investors. However, we expect that when the
hypothetical investor pool predominantly consists of investors who
fully understand the differences between different financial
intermediaries, as we assumed for this example, overall costs borne by
both investors (e.g., search costs) and financial intermediaries (e.g.,
customer acquisition costs) are minimized by the use of distinct names
and titles clearly identifying financial intermediary type.
    As the hypothetical pool of less knowledgeable investors that face
confusion over company names, titles, or services increases, the choice
of names and professional titles by financial intermediaries become
more complex to analyze and depends on a number of factors related to
investors. These factors include, among others: (i) Whether and how
much these investors infer information from titles about the type of
advisory or other services provided; (ii) the source of investors'
confusion, such as (a) a lack of understanding about the type of
service they would prefer, (b) an inability (in the absence of
additional information) to understand the differences in the services
offered and their associated payment models, or (c) a lack of knowledge
about professional titles and information provided therein; (iii) how
easily investors can learn, upon meeting with a financial professional,
about whether the type of advice or other services provided by the
financial professional meets their preferences; (iv) whether investors
could be persuaded to choose a type of advisory service that is not
consistent with the investor's preferences after meeting with a
financial professional; (v) investors willingness or ability to keep
searching for a financial professional until they find one that best
matches their preferences; and (vi) the distribution in the investor
pool of investors with different levels of knowledge and understanding
as described above.
    When less knowledgeable investors are confused not only about what
services broker-dealers and investment advisers provide, but also are
confused about the types of services that they would prefer, the
factors noted above may lead firms and financial professionals of
either type to rationally choose generic or common terms in names and
titles. Consider the example where retail investors know they would
benefit from financial advice in a general sense, but are confused
about which type of investment advice relationship and associated
payment model would be best for them.\665\ A portion of these investors
are also persuadable, to some degree, to contract for whatever service
is offered to them by any given financial professional they contact,
regardless of whether that type of service matches the investors'
preferences.
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    \665\ The assumptions underlying this hypothetical example are
meant to be illustrative of the incentives of firms and financial
professionals to pick certain names and titles when their pool of
potential customers is relatively uninformed. Should the
relationship summary disclosure be provided to potential and
existing customers, we believe that some of the confusion regarding
the nature of services would be addressed/mitigated; however, some
investors may still, even in the event that the relationship summary
is provided be confused about what type of firm or financial
professional or which particular service is best for their investing
situation.
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    In this case, and in order to maximize the number of investors that
a firm or financial professional may be able to contract with, both
broker-dealers and investment advisers facing these less knowledgeable
investors would have incentives to pick names and titles that are the
most effective at getting these investors to approach them, to the
extent that names or titles alone have any impact on the choices made
by these investors.\666\ Once these investors make contact, a firm and
financial professional hypothetically may be able to persuade the
investor to hire them regardless of the type of financial advice
relationship offered, to the extent that the investor cannot
distinguish the characteristics of different types of advice
relationships that best fit their preferences, does not know the most

cost effective way to pay for that relationship, and cannot easily
distinguish between the types of relationships that are offered by
different firms and their financial professionals. In order to attract
this type of investors, firms may favor titles that indicate their
financial professionals' ability to dispense guidance and advice. For
example, they may select titles that include the word ``adviser'' or
``advisor,'' such as ``financial advisor''.\667\
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    \666\ Although a number of studies discussed in the baseline
provide survey evidence that investors are confused about titles, we
are unaware of any direct evidence that titles alone affect the
choice of firms or financial professionals that are contacted or
eventually hired. However, in conjunction with the proposed
relationship summary, we expect that investors would gain better
understanding of the services provided by, and standards of conduct
applicable to, broker-dealers and investment advisers, which could
lead to more informed decision making about choosing the type of
financial intermediary that best matches to the investors' own
expectations regarding services and standard of conduct.
    \667\ Alternatively, these firms may choose relatively generic
names or titles that in other ways suggest an advisory service, such
as ``financial planner'' or ``financial consultant,'' which are not
subject to the present rulemaking proposal.
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    In addition to potential search costs expended by less
knowledgeable investors, these investors also bear a greater risk of
mismatch between the type of advice relationship that best fits their
preference and the actual advisory service for which they contract.
However, in this example, the mismatch arises because of investor
confusion over the type of relationship that best would meet their
preference, and this confusion itself may lead the investor to, by
chance, seek out a type of firm or financial professional that is
inconsistent with the investor's preference, rather than any confusion
directly related to the firm's or financial professional's use of a
common name or title. Conversely, generic names and titles may make it
easier for less knowledgeable investors to identify a broader class of
firms or financial professionals that can meet their perceived need for
financial advice to some extent.\668\ In situations where the pool of
less knowledgeable investors is likely to be large, one likely outcome
is that many firms and financial professionals could end up using
similar names or titles, which would potentially increase search costs
for those more knowledgeable investors who otherwise may use names and
titles as an initial sorting mechanism.
---------------------------------------------------------------------------

    \668\ To the extent generic titles in use today such as
``financial planner'' and ``financial consultant'' make it more
likely less knowledgeable investors can identify both investment
advisers and broker-dealers that offer advice, there may be benefits
to some of these investors if they in their contacts with financial
professionals of both types learn about which relationship and
payment models is most consistent with their preferences.
---------------------------------------------------------------------------

    Other particular kinds of investor confusion, which could impose
costs on some investors, may provide benefits, such as increased
customer flow, to only a certain type of firm or financial
professional. For example, some investors may be fully aware of the
type of advice relationship that they prefer, but are confused about
which firm or professional names and titles are associated with that
type of advice relationship. In particular, consider a situation where
investors know that they would like an advice relationship that is
provided by investment advisers. In this case, some broker-dealers may
have incentives to use titles such as ``advisor'' that suggest such an
advice relationship to maximize their customer flow. As a result, some
less knowledgeable investors may be misled to wrongly approach broker-
dealers rather than investment advisers in their search for advice, and
bear both potentially higher search costs and an increased likelihood
of a mismatch between the type of advice that is received and the type
of advice that is preferred. The risk of a mismatch and associated harm
in this case would be especially large for any of these investors that
primarily base their choice of firm and financial professional on names
and titles, rather than any information they would receive from a firm
or financial professional about the type of services or applicable
standards of conduct.
    In addition to the factors related to investors discussed above,
the selection of names and titles by financial intermediaries also
depend on other factors specific to the intermediary. For example,
competitive concerns may cause some financial intermediaries to simply
choose terms in names and titles that are commonly used by other
financial intermediaries of their type. Alternatively, firms may choose
names and titles that distinguish them from their competitors. Some
firms or financial professionals may choose ambiguous generic titles,
such as ``financial consultant,'' in order to capture a larger fraction
of the investor pool, thinking that investors may seek information if
the title does not clearly identify the kinds or levels of services
provided or the applicable standard of conduct. We acknowledge that
these factors could also be important determinants of the choice of
names and titles.
2. Economic Effects of the Proposed Restrictions on the Use of Certain
Titles and Required Disclosures
    In this section we discuss the potential economic effects from the
proposed rules to the directly affected parties: Investors, standalone
broker-dealers, standalone investment advisers, dually registered
firms, and financial professionals. Potential economic effects on
indirectly-affected parties, in particular financial intermediaries not
regulated by the Commission, are discussed in the next section.
a. Investors
    The objective of the proposed rules is to reduce retail investor
confusion and limit the ability for retail investors to be misled that
a firm or financial professional is an investment adviser as a result
of the use of firm and financial professional names and titles that
contain either ``adviser'' or ``advisor''. Specifically, our proposed
rule seeks to enable retail investors to be able to discern more fully
whether a particular firm or financial professional will offer advisory
or other services provided by investment advisers versus those provided
by broker-dealers. In this section, we discuss the potential benefits
to investors as a result of the proposed rules, while considering the
potential costs that could be borne by investors. In general, we expect
the benefits and costs are unlikely to be evenly distributed among
investors, but will rather depend on both the differences in investors'
preferences for broker-dealer or investment adviser services, and
investors' individual degree of understanding what services any given
firm or financial professional is providing and the standard of conduct
that is applicable.
i. Benefits of Restrictions on the Use of Certain Names or Titles
    The proposed restriction on the use of the terms ``adviser'' and
``advisor'' in names and titles of broker-dealers who are not also
dually registered as investment advisers and of financial professionals
who are not supervised persons of investment advisers and who provide
advice on behalf of such advisers, may reduce investor confusion about
what type of firm or financial professional is likely to match with
their preferences for a particular type of investment advice
relationship. The proposed rule may also reduce corresponding search
costs for some investors under certain conditions. Moreover, the
proposed rule may reduce the likelihood that a mismatch between an
investor's preferences and the services offered by a firm or financial
professional occur.\669\ Specifically, to the extent investors looking
for an advice relationship of the type provided by investment advisers,
and believe that

names or titles containing the terms ``adviser'' or ``advisor'' are
associated with this type of advice relationship, the proposed rule
would make it easier to identify firms and financial professionals that
offer such advice relationships, thereby reducing investor confusion,
search costs, and any mismatch in the advice relationship that may
occur from the potential misleading nature of such names or titles, as
well as any associated harm with such mismatch.\670\
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    \669\ We note that a potential mismatch could occur because
investors may contact the wrong type of firm or financial
professional and may not fully understand the type of financial
advice that best match their preferences (even if the proposed
relationship summary is made available), may be persuaded to hire
the wrong type of firm or financial professional, or may be misled
that a firm or financial professional will provide the type of
service that the investor prefers, but in fact, does not.
    \670\ See supra discussion in Section IV.C.1.
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    As a result of the proposed restriction on the use of certain
terms, we expect the greatest potential reduction in search costs for
retail investors who know that they specifically want the services
provided by investment advisers and also would use names and titles in
their search. The proposed rule would potentially make it easier for
such investors to distinguish firms and professionals providing
investment adviser services from firms and professionals providing
brokerage services. The proposed rules may also reduce search costs for
investors that prefer brokerage services, if standalone registered
broker-dealers and financial professionals who are not supervised
persons of an investment adviser or who are supervised persons but do
not provide investment advice on behalf of such investment adviser are
using names or titles including ``adviser'' and ``advisor,'' would
choose new names and titles due to the proposed rule that more
distinctly indicate the types of services they provide, such as
``broker'' or ``broker representative.''
    However, the reduction in search costs for retail investors as a
result of the proposed rule would be limited to the extent the firms
and financial professionals covered by the restriction on the use of
the terms ``adviser'' or ``advisor'' are not currently using the
proposed terms in their names and titles. Further, the potential impact
of the proposed rule on search costs is likely to be mitigated to the
extent the proposed rule is limited to firm names and job titles, and
would not itself affect the use of terms, such as ``advisory services''
in other communications or using those terms in metadata to attract
internet search engines.\671\ Moreover, beyond registered investment
advisers, dual registrants, and their supervised persons, other types
of financial services providers, such as insurance companies and banks,
may also continue to use the terms ``adviser'' and ``advisor'' in their
names and professional titles, and any confusion and search costs borne
by investors related to the use of such names and titles by financial
intermediaries not affected by this proposed rule would not be reduced.
As noted above, the Commission recognizes that terms such as
``financial advisor'' or ``financial consultant'' may be used by banks,
trust companies, insurance companies, and commodities
professionals.\672\
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    \671\ As discussed above, these other communications by firms
and financial professionals would continue to be subject to
antifraud rules. See supra note 309.
    \672\ See supra note 400. Further, as identified by Commission
staff, as of December 2017, approximately 546 broker-dealers
reported at least one type of non-securities business, such as
insurance, retirement planning, and real estate; see supra note 459.
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    As discussed above in Section IV.C.1, some investors may be
confused by names and titles and believe that certain names and titles
are likely to specifically signal the type of advice services provided
by firms and financial professionals that use those names and titles
and the associated standard of conduct.\673\ In particular, investors
that prefer the type of investment advice relationship and the
associated standard of conduct offered by investment advisers may
believe that names or titles containing the terms ``adviser'' or
``advisor'' are only associated with that type of advisory
relationship. If some of these investors are persuaded by financial
professionals associated with broker-dealers (who are not themselves
investment advisers or supervised persons of investment advisers who
provide advice on behalf of such adviser) that they could have a
similar type of advice relationship as they would with an investment
adviser, a potential mismatch between investor preferences and the
advice relationship received may occur, which in turn may lead to
investor harm such as higher payments for the services by the investor
than necessary.\674\ Thus, the proposed prohibition on the use of
``adviser'' or ``advisor'' by certain broker-dealers may reduce the
risk of a mismatch between investors seeking advisory services of the
type provided by investment advisers and the type of services for which
they contract, as these investors under the proposed restriction would
be potentially less likely to be misled or inadvertently approach and
hire a type of firm or financial professional that does not match with
their preferences and expectations.
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    \673\ As discussed in Section IV.A.3.b, survey evidence suggest
that many investors in general do not have a clear understanding
about the differences in the nature of the advisory services
provided by, and standard of conduct applicable to, different types
of financial professionals.
    \674\ Broker-dealers may elect to provide some services similar
to those of many investment advisers, such as ongoing monitoring,
thereby potentially mitigating any mismatches between preferred
services and the services provided.
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    Because mismatch in investor preferences and the type of advice
relationship they receive can potentially be very costly for investors
by resulting in inefficient advice relationships, reducing this cost
could be a potential benefit of the proposed rule for some investors.
In particular, if an investor seeks an advice relationship of the type
offered by investment advisers, but mismatches to a brokerage
relationship, then the frequency of advice received may not be the most
appropriate, or the cost for the advice may be too high if it leads to
frequent trading, and could result in suboptimal investment decisions
or lower investment returns net of costs. The Commission preliminarily
believes this reduction in mismatch risk would mainly apply to those
investors seeking a relationship similar to that provided by investment
advisers, as discussed above. However, for at least some investors
requiring advice on a per-transaction basis, the confusion about the
use of titles or the services provided by financial professionals could
potentially lead them to inadvertently select investment advisers even
if they truly want a broker-dealer. To the extent the proposed rule
would also help these investors more clearly distinguish between
broker-dealers and investment advisers, they may avoid inadvertently
hiring an investment adviser and thereby avoid paying potentially
higher fees for that type of advice relationship.
    At this time the Commission is unable to estimate how many
investors have contracted for services that do not meet their
preferences, or are paying more than they would have preferred for
services, due to confusion about the names and titles of financial
intermediaries. Further, to the extent that confusion exists among
retail investors regarding the names and titles used by firms and their
financial professionals, surveys of retail investors with brokerage
accounts suggest that they tend to be satisfied with their firms and
financial professionals, and also believe that services provided by
these firms and financial professionals are valuable, which further
complicates any estimate of the incidence or magnitude of harmful
mismatch.\675\
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    \675\ See RAND Study, supra note 5, at 98.
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    As discussed above with respect to search costs, any reduction in
mismatch risk associated with investor confusion over names and titles
would be limited to the extent that standalone registered

broker-dealers and their associated natural persons do not use the
proposed prohibited terms in their names and titles. This would also be
the case to the extent that registered representatives of dually-
registered broker-dealers who are not themselves supervised persons of
an investment adviser or who are supervised persons but do not provide
investment advice on behalf of such investment adviser do not use those
terms. The potential reduction in mismatch risk due to this proposed
rule would also be limited to extent the rule is limited to firm name
and individual job titles, and would not itself affect firms and
financial professionals from using terms such as ``advisory'' in other
content. Moreover, other types of financial intermediaries may use the
terms ``adviser'' and ``advisor'' in their names and titles, such as
banks, trust companies, insurance companies, and commodities